Daniel Tarullo

The Federal Reserve announced Tuesday morning it’s making an emergency half percentagepoint rate cut, as fears continue to mount about the global spread of COVID-19. Marketplace host Kai Ryssdal spoke to Daniel Tarullo, a former member of the Federal Reserve’s Board of Governors and professor at Harvard Law School, about what the central bank’s decision process may have been like. “The mood was probably a fairly somber one,” Tarullo said. “I suspect a lot of preliminary discussions were held last week.” Despite the rate cut, the Dow fell 700 points today. Tarullo said the market reaction implies that the Fed’s announcement may have further worried people about the severity of COVID-19.

The Federal Reserve is running the risk of fomenting an eventual financial crisis by easing banking regulations at the same time that it’s cut interest rates. So say some former Fed officials, including ex-Vice Chairman Alan Blinder and financial stability experts Daniel Tarullo and Nellie Liang. They worry that the combination of looser credit and laxer rules will prompt financial institutions and investors to pile on leverage and take excessive risks. While that may spur economic growth in the short run, it could end up triggering a recession once the speculative bets are unwound...Fed leadership though has pushed back hard against suggestions it has made the financial system more vulnerable by loosening regulations, arguing that the capital requirements of the biggest banks remain as tough as ever...Former Fed Governor Daniel Tarullo is not so sure. He zeroed in on the stress tests, including the disclosure of more information about the models behind them. “I suspect quite strongly that the effective amount of capital the banks have to have for a given portfolio is lower because they have so much more information about the stress tests,” said Tarullo, who was the Fed’s point man on regulation after the 2008 crisis and is now at the Harvard Law School.