Fed's Bowman says small firm failures may increase, cites state virus restrictions

March 22, 2021 7:16 PM EDT

FILE PHOTO: U.S. Federal Reserve Governor Michelle Bowman poses at a conference on monetary policy at The Hoover Institution in Palo Alto, California, U.S., May 3, 2019. REUTES/Ann Saphir


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WASHINGTON (Reuters) - The faster-than-expected U.S. economic recovery may not prevent a massive loss of small businesses across the country, with federal lending and other programs perhaps only serving to postpone a reckoning, Federal Reserve Governor Michelle W. Bowman said on Monday.

Bowman said that census data and conversations with bankers have left her worried that the so far low level of bankruptcies and broadly healthy credit metrics mask what's happening -- and she cited state-level health restrictions as a source of pressure on small firms.

"Financial pressures on many small businesses remain acute, and I am concerned that a growing number of small businesses have already been closed permanently or are on the verge of failure," Bowman said in remarks prepared for delivery by webcast to the Economic Club of Oklahoma. She said bankers have told her "that the Paycheck Protection Program and other fiscal policies have postponed, but not eliminated, these financial pressures."

Bowman said the risks to small businesses are one of her major doubts about the economic outlook, which is otherwise in line with those of her colleagues for strong growth this year. She expects, as do they, that the Fed will keep its low interest rates and bond-buying intact until the economy is more completely recovered, which "will take some time."

But she went further than other Fed officials have in citing the impact that state-level restrictions have had on small businesses, suggesting the states that cracked down hardest to tame the virus did damage to their local firms.

"These restrictions may have been helpful in containing the pandemic, but they appear to have disproportionately impeded small firms’ ability to maintain their operations and revenue sources, leading to substantial cash-flow pressures," said Bowman. She served as state bank commissioner for Kansas before her appointment to the Fed board by President Donald Trump in 2018 to a Fed seat allotted to represent the interests of community banks.

The restrictions "came at a very high economic cost," she said.

Fed officials including Chair Jerome Powell have largely encouraged aggressive efforts to contain the coronavirus as the only sure path to economic recovery, and encouraged the use of fiscal programs like the Paycheck Protection Program of loans to small businesses to keep households and firms intact until the health crisis eases.

(Reporting by Howard Schneider; Editing by Leslie Adler)



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