The Federal Reserve faces a dilemma heading into their September conference. Small businesses continue to struggle without additional assistance. And wildfires are driving more volatility in lumber prices.
- The Fed has taken unprecedented steps during the pandemic to ensure markets continue to function.
- They could do more, but some fear that additional actions could exacerbate divisions in the economy.
- 45.3% of small business owners said they believe that a return to normal operations is likely to take at least 6 months.
- An MIT study suggests that the Paycheck Protection Program saved just 2.3 million jobs (of a possible 70 million).
- Lumber prices have retreated slightly in recent weeks, but are still up 50% for the year.
- An Oregon wildfire has reached the timber operations of the continent’s largest wood producer.
So what?
The Federal Reserve finds itself in a tricky spot ahead of its September meeting, which begins tomorrow. A variety of data suggest the economy’s recovery from the pandemic has slowed in recent weeks, and the federal government has yet to come to an agreement on additional fiscal support — prompting some calls for the Fed to inject more monetary stimulus into the economy. The Fed has taken unprecedented steps over the last few months – including unlimited purchases of mortgage backed securities and direct support to private sector companies – to ensure markets continue to function. It also recently made a fundamental adjustment to its policy framework, aimed at aiding employment through the next economic expansion. There is more that they can do, but the underlying question is whether they should. Some argue that the challenges the economy is facing are not due to a lack of market function, and that further loosening monetary policy could exacerbate the already wide disconnect between Wall Street and Main Street. Others argue that more Fed action could delay a new fiscal recovery package, something that is arguably a more pressing need at the moment. Fed Chair Jerome Powell’s statements in the next couple days will be a telling sign of how the central bank views its role in this next phase of the recovery.
As the economic recovery cools, the fate of many of the nation’s small businesses hangs in the balance. The $2 trillion CARES act included relief for small businesses through the Payroll Protection Program (PPP), but unlike support for larger businesses and financial markets, this aid for small businesses came with more hurdles and was ultimately insufficient. A July study by MIT estimated that the PPP saved only 2.3 million jobs, each at a cost of $224,000 — despite Census Bureau estimates of roughly 70 million people that worked for a PPP-eligible business at the beginning of 2020. More than three-quarters (76%) of small business owners surveyed by the Census said the pandemic has had a moderate to large negative effect on its business, and 45.3% said they believe that a return to normal business operations is likely to take at least 6 months – up from prior surveys. About 19% of small businesses that were open in January remain closed as of mid-August.
Even before wildfires began ravaging the American West, the lumber industry was experiencing one of its craziest years on record. A reduction in the supply of lumber, brought upon by the temporary closure of sawmills due to the pandemic and existing trade-related hurdles, was quickly followed by a sharp increase in demand brought upon by a booming housing market and increased interest in home improvement projects. The combination sent lumber prices skyward. Lumber futures have risen 50% this year and are trending toward their largest one-year increase since 1993. The supply shortages are likely to worsen as a result of the wildfires. On Friday, Weyerhaeuser Company — the continent’s biggest lumber producer — announced that a wildfire had reached its timber operations in Oregon. This dynamic will likely place more upward pressure on the price of newly constructed homes in coming months.
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