The U.S. economy could face a credit crunch as the weather gets colder if the coronavirus worsens, experts warn, Reuters reported.
Some of the warning signs could be a rise in foreclosures and more business bankruptcies. Without additional financial aid, all of these things could make it harder for both consumers and businesses to access credit, according to Boston Federal Reserve President Eric Rosengren.
“I think the challenge is that we are very likely to face a credit crunch kind of issue as we get towards the end of this year,” he said, speaking with Reuters Wednesday (Sept. 23). He said things might not have been so bad if the pandemic had ended after three months, but that window is clearly up now.
He said there could be special risk for smaller banks, which could be in extra trouble if there's a rise in delinquencies in commercial real estate loans while businesses are still fighting to stay open, Reuters reported.
Rosengren told Reuters that there could be ripple effects if the infections increase this winter. If areas are forced to lock down a second time, or if people begin staying home out of fear more often, the economy could contract. If the growth is slow, the Fed could end up having to keep inflation rates near zero for longer.
More financial aid is the answer, according to Rosengren — an outlook shared by other officials including Treasury Secretary Steve Mnuchin and Fed Chair Jerome Powell. PYMNTS reported that both of them have advocated for more financial stimulus payments as a way to keep the economy buoyed. So far, Congress has yet to pass another package, however.
Rosengren's outlook is more pessimistic than the median outlook of other members of the Federal Open Market Committee, Reuters reported. The median tends to call for the unemployment to drop to around 7.6 percent and the economy to contract about 3.7 percent by the end of the year.