Mark Wilson
on August 9, 2011 in Washington, DC.
The Fed stepped up. The financial markets shrugged. Now what?
Here are the “nut paragraphs” of National Association of Home Builders chief economist Robert Dietz’s take on the .25% cut the Fed took on its top rate on federal funds rates, effectively lowering the discount rate from 1.25% to 0.25% as a means of ensuring liquidity for depository institutions.”
This was a necessary move by the nation’s central bank, and one that is supportive of housing markets. It is good that the Fed did not wait until Wednesday and acted before major markets opened on Monday.
More support will be needed however, as forecasts – including NAHB’s – expect economic growth to be markedly negative for the second quarter. The degree of growth in the third quarter and for 2020 as a whole will depend on whether current virus mitigation efforts are successful in flattening the curve for infection.
Further helpful commentary comes this morning from BUILDER sibling Meyers Research chief economist Ali Wolf. Her high-level highlights:
No negative rates. The latest 100 basis point cut brought the short-term rate near zero. Policymakers at the European Central Bank and the Bank of Japan have already moved short-term rates into negative territory. The US Federal Reserve did a year-long study on the efficacy of monetary policy and don’t believe negative rates make sense domestically. As such, the Federal Reserve is going to have to rely on other monetary policy tools to stimulate growth when needed using forward guidance and asset purchases.
Restore normality to Treasurys and mortgage-backed securities. The Federal Reserve committed to buying at least $500B in Treasury bonds and $200B in mortgage-backed securities in an effort to normalize the markets. For example, the 10-year Treasury yield and mortgage rates typically move in tandem but recently diverged for two main reasons:
- Banks and mortgage brokers have been inundated with loan requests, especially refinances, and needed to control volume via higher rates.
- There has been a recent shift away from the mortgage-backed security market brought on by the refinance boom, which pushes the yield up.
The move by the Fed to buy $200B in mortgage-backed securities is looking to solve the latter.
Easier access to credit. Federal Reserve officials also acknowledged the stress for families and businesses as a result of COVID-19 and both lowered the interest rate at which they will lend to banks so that those institutions can lend to consumers and extended the term to 90 days.
The moves yesterday are designed to help the economy weather today’s slowdown and be well-positioned for growth when the virus slows. Jerome Powell acknowledged that no one knows whether this will be a temporary blip or longer-term issue. That depends on how the virus progresses.
Our primal urge–deep and involuntary–is for normalcy. We naturally crave a finite and concrete set of terms, trajectories, and durations, to which we could then contour our planning. For now, though, we much endure the whiplash of volatility. We must suspend expectations and estimations as to how intense or how protracted or how extensively our everyday lives get drawn into the vortex.
Not only that. We’ve little choice to accept that right now–mid-March–we’re only at the beginning of what may be several more weeks, under the best circumstances, will get worse, very much worse, before it gets better. This is why Dietz’s comment below is a really important one.
The Fed cannot do this alone. Additional policy support will be needed in the areas of regulatory policy and fiscal stimulus to ensure small businesses and households are able to endure during this period of mitigation.”
Dietz is 100% right about this emergent need to place a solid floor below us. He’s especially right when he notes, “the Fed cannot do this alone.”
For the financial markets to function, a level of confidence in their ability to withstand shocks and continue to work is essential. That critical element of sentiment is in play right now. Confidence–among investors, borrowers, businesses–is a lynchpin to a functioning economic marketplace.
We, as leaders, have to have a preternatural capability right now. It is both to maintain calm and to act as if the very worst-case scenarios for the public health crisis to play out.
The reason for this is that in order to possibly effect the best-case scenarios, we have to suspend our urge for normalcy, accept that rates of infection, rates of severe cases, and morbidity rates are all fast-moving targets. We have to imagine and act on this.
Here’s a terrific example of the kind of balance home building leaders can strike with team members, partners, customers, and other stakeholders amidst the turmoil, volatility, and uncertainty. It’s a note from Tedd Benson, founder, principal and president at Walpole, N.H.-based Bensonwood Homes.
A Note About Our Response to COVID-19
The rapidly evolving coronavirus [COVID-19] is impacting individuals and companies around the world. At Bensonwood and Unity Homes, our highest priority is the health, safety, and well-being of our employees and their families, and our clients and partners. For these reasons, we are implementing a comprehensive plan to reduce the risk of exposure to the virus.
In January, our safety and human resources personnel began proactively monitoring the outbreak, educating associates, and raising awareness about the coronavirus. Our response plan is to maintain a safe workflow while continuing to provide the same high level of quality and service our clients expect.
Measures include:
- Utilizing video and audio conferencing in place of in-person meetings.
- Canceling all non-essential travel and conference participation.
- Limiting the number of people in conference rooms.
- Reducing the number of subcontractor interactions on active job sites. Encouraging remote working when possible.
- Curbing internal social gatherings.
- Restricting the use of shared kitchen appliances.
- Controlling and monitoring access for vendors.
- Also, we have implemented a protocol for hand washing, disinfecting surfaces, and social distancing. Employees have been asked to avoid large public gatherings and track external exposure. Our preparedness task force is monitoring the status of COVID-19 in our communities, and our policies will likely evolve accordingly.
More than anything, I want to give our team and our partners a chance for calm. Everyone has been working diligently while adjusting to all the changes, which adds to a heightened state of anxiety. My sincere thanks for everyone’s patience and understanding. We will move forward together and continue to be a force for positive good in our world.
Calm is the operative term. Heightened anxiety is not widely known to be a great help when it comes to sharp judgment, good decision-making, smart choices. Calm, however, also going to be easier said than done, especially as the public health crisis tallies start–via more widespread, accessible, and conclusive testing–to skyrocket to catch up with an actual reckoning moment with the transmissability of COVID-19. We must have a plan, a simple, doable, step-by-step set of behaviors that prevail and become second-nature for when things get worse before they get better.
Here, from Harvard Business Review contributor Paul Argenti, professor of Corporate Communication at the Tuck School of Business at Dartmouth College, is a checklist of communications tactics for every organization, top-down, and from the bottom-up, to establish as practice to ensure team member safety and health, and to stand-up as trusted partners to your customers:
- Post information regularly in a highly visible location. This can be a physical location or virtual — email, the company intranet, or a Slack or Facebook channel.
- Describe how decisions were made about issues such as travel, working from home, etc.
- Communicate no less than every other day.
- Try to provide timely information rather than waiting until you know all of the answers.
Step 3: Communicate Regularly with Customers: Customers require a different approach than employees given that companies do not have the same access nor frequency with this constituency. You should:
- Focus on what is important to the customer. For example, Target sent out a note from the CEO to customers, describing enhanced cleaning procedures and additional staffing for order pickup and drive up services.
- Provide relief when possible. JetBlue became the first airline to waive change and cancel fees for coronavirus-related concerns. The move went a long way towards reassuring current customers as well as bringing new ones on board. CVS Caremark is working to waive early refill limits on 30-day prescription maintenance medications. Insurance companies, in contrast, do not consider the coronavirus a valid reason for cancelling a flight.
- Focus on empathy rather than trying to create selling opportunities. Companies should rethink advertising and promotion strategies to be more in line with the current zeitgeist.
We know this. Both overreacting to today’s public health crisis–“crying wolf”–and under-appreciating the risk lead to a similar, destructive end. Overblowing the potential danger of a situation numbs people to the actual threat. Downplaying or dismissing a peril is reckless and can add to the catastrophe–like ignoring officials’ warnings calling for social distancing, staying at home, practicing an “abundance of caution,” washing one’s hands, etc. Either way, too many people wind up getting hurt.
Striking a balance is critical. Balanced insight, measured emotion, and an emphasis on science, facts, and evidence can help us alter our behaviors despite our involuntary instincts to view our worlds as normalizing.
That balance is us. We have today unprecedented means of connecting, unifying, and synchronizing our response and resolve in light of both the public health and the economic epidemics now taking hold and wreaking havoc on our lives.
Our response and resolve do not require certainty, nor a quick fix, nor promises that the damage is under control.
What they do require is a willingness to see this as a “we” challenge.
Design thinking, and the Stanford University school of design, helps us mortals of the world take practical insight from a simple question, “how might we … ?”
“How might we #flattenthecuve?”
“How might we #makehousingattainable?”
“How might we change #thefutureofwork?”
“How might we achieve a #carbonpositive sheltered environment?”
We face all of those urgencies today. The first now stands in the path of the others.
The Fed buckled down. The markets buckled. How might we secure a resilient future for our vitally important business, design, development, construction, and manufacturing community?
The answer’s in the question: We. That’s how.
