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Financial Services Law Insights and Observations

Fed details Covid-19 economic strain on households and financial sector

Federal Issues Federal Reserve Covid-19 Consumer Finance

Federal Issues

On May 14, the Federal Reserve Board (Fed) issued the latest Report on the Economic Well-Being of U.S. Households, which outlines the results of an October 2019 survey of over 12,000 adults. Notably, the Fed included supplemental data from an April 2020 survey of 1,000 adults, which caused the Fed to state that financial conditions “changed dramatically for people who experienced job loss or reduced hours during March 2020 as the spread of COVID-19 intensified in the United States.” Highlights of the supplemental data include: (i) 19 percent of all adults reported either losing a job or experiencing a reduction in work hours in March; and (ii) among the adults who experienced a job loss or had hours cut in March, 51 percent indicated they were at least “doing okay” financially, while 48 percent were “finding it difficult to get by” or “just getting by.”

Additionally, on May 15, the Fed released its Financial Stability Report, which focuses on the effect of the Covid-19 pandemic on U.S. financial stability and discusses the Fed’s response. The report notes that due to the Covid-19 pandemic, “disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit” and that the banking sector “may experience strains as a result,” even though it had large capital and liquidity buffers before the shock. Overall, the Fed concludes that the outlook for the pandemic and economic activity is “uncertain.” The report also notes that (i) asset prices remain vulnerable to significant price declines; (ii) the issuance of high-yield corporate bonds and the origination of leveraged loans appear to have slowed appreciably; (iii) the prospect for losses at financial institutions appears elevated; and (iv) while funding markets proved less fragile than during the 2007-09 crisis, Fed actions were required to stabilize short-term funding markets.

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