The Federal Reserve's New Tool in Case of Recession
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What is the main topic discussed in this episode?
Here's your money briefing. I'm J.R. Whalen at The Wall Street Journal in New York. The Federal Reserve, of course, uses changes in interest rate levels to respond to changing economic climates. But it also has a recently developed tool that is not widely known, but it has the big banks nervous. In a moment, we'll check in with a Journal reporter for details. First, some money and market news you should know. The Journal's economic team makes the point that the federal minimum wage of $7.25 an hour is fairly irrelevant. That's because 29 states have set their minimum wage higher, and that represents about 60% of the workforce. In addition, numerous large employers like Amazon, McDonald's and Walmart have pledged to pay employees higher than the federal minimum wage, and the tight labor market has forced companies of all sizes to do the same.
That leaves a little more than a quarter percent of the nation's 156 million civilian workers making the minimum wage last year. Most of them were under the age of 25.
What is the countercyclical capital buffer and why is the Fed talking about it now?
And while the federal minimum wage is a hot topic for argument, it's unlikely to be raised anytime soon. A bill that would raise the minimum recently passed the Democratic House, but Republicans in the Senate are not likely to consider it. And the White House says faster economic growth is the best way to produce wage increases, not the government directing an increase. And the Olive Garden restaurant chain has had a lot of success with its never-ending pasta pass, which costs $100. Well, it actually offers guests nine weeks of unlimited pastas and sauces. But now 50 pasta lovers will be able to upgrade to a $500 lifetime pasta pass when they go on sale Thursday, August 15th. The offer also comes with unlimited breadsticks.
And to balance out all those carbs, unlimited soups and salads as well.
How would increasing capital requirements during booms prevent future credit crunches?
We've been following the Federal Reserve's delicate task of finding the right level for interest rates as it weighs low unemployment and low inflation here in the U.S. against economic declines overseas. But in addition to interest rates, the Fed has another tool in its arsenal to use in the event of a credit crunch brought on by an economic downturn. And Wall Street Journal reporter Lalita Klozel is here with some details. So Lalita, it's called a counter-cyclical capital buffer. In some plain English, what exactly would that do?
So the counter-cyclical capital buffer allows the Fed to increase capital requirements when the economy is doing really well and there are potential signs that it might not last and there are risks rising in the economy.
Could the buffer be used in reverse to ease lending during a recession?
So the idea is that you increase capital requirements, make banks sock away more capital so that when a downturn hits, then the Fed can then decrease those capital requirements And at that moment, allow the banks to lend more at a time when their lending is most needed because they're, you know, at times of recession that can bring about a credit crunch.
You know, hindsight is 20-20, and I guess the Fed feels the buffer could have come in handy during the last downturn.
Right. And it didn't exist during the 2008 financial crisis. It's a pretty new tool. It was created after by international regulators. There are other countries that have turned it on, like Sweden and the UK.
Which banks would be affected and what asset size threshold matters?
And in the U.S., so far, it's never been turned on. Several Fed officials feel that capital requirements and capital levels in the system are about rights. So they feel like we don't need to turn the dial up right now, even though the economy's been doing pretty well. And not all Fed officials agree on that. But now some of the Fed officials who feel that even though capital levels are right now are saying that they're weighing finding ways to use that countercyclical capital buffer not to increase capital when things are going well, not just in that direction, but in the other direction. So in other words, you would reserve the tool for when the downturn hits, and at that moment, you would have extra flexibility to cut capital requirements for banks so that banks can lend more.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–1:05
2
What is the countercyclical capital buffer and why is the Fed talking about it now?
1:05–2:01
3
How would increasing capital requirements during booms prevent future credit crunches?
2:01–2:48
4
Could the buffer be used in reverse to ease lending during a recession?
2:48–3:30
5
Which banks would be affected and what asset size threshold matters?
3:30–4:24
6
Why are some Fed officials and banks divided over turning the buffer on?
4:24–6:04
7
What is the Fed’s current stance and history on activating the countercyclical buffer?
6:04–6:51
Speakers
2 identifiedMore from WSJ Your Money Briefing
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