Fed Announces Major New Action to Cushion Economy, Stabilize Markets

In the weeks ahead, it’s probably a good idea to take economic forecasts you read or hear every day with a grain of salt. Economists and analysts are temporarily flying blind as the world entrenches to limit coronavirus transmission. We think it’s more helpful to frame the current situation and potential paths ahead more broadly.

The U.S. economy was chugging along with strength before the coronavirus and social distancing sent it tumbling down the side of a valley. Right now, no one knows how steep and deep (the economic impact) or wide (the duration) the valley is. The virus, and our response to it, will ultimately dictate the valley’s shape. But here’s the catch-22: Social distancing is our best strategy to stifle the virus faster, but stiff distancing measures could deepen or broaden the economic valley.

In a perfect scenario, as Roche CEO Severin Schwan recently said, the virus would disappear if the whole world isolated for 14 days. We know that isn’t going to happen (the world isn’t perfect), but, at least for us, that implies the pandemic has a mathematical conclusion or endpoint. We’ll eventually emerge from the valley, and the good news is we have a say in how quickly that happens.   

Meantime, monetary and fiscal policymakers are acting much faster than in 2008 to backfill the valley with truckloads of economic aid to lessen its severity and help businesses and consumers stay afloat. Although there’s no guarantee these interventions will be successful, history shows they have a pretty good track record.

WALL STREET WRAP

On the Monetary Front: The Federal Reserve this morning announced a massive set of actions aimed directly at getting capital to small and medium sized businesses, consumers as well as state and local governments. In addition to announcing that it will buy unlimited Treasuries and Mortgage Backed Securities, the Fed is attempting to provide liquidity to corporate bond and municipal bond markets. The Fed also announced the establishment of a Main Street Business Lending Program to support lending to eligible small- and medium-sized businesses, complementing efforts by the SBA. This morning’s announcement follows a plan last week to purchase $500 billion in Treasury securities and up to $200 billion in mortgage bonds.

To get through this economic valley, we’ll need both monetary and fiscal policies to be pulling in the same direction. Here’s one quick example: The federal government’s coronavirus aid package will boost government spending and could push Treasury bond yields higher. However, the Fed can purchase those Treasury securities to counter any undesired rise in yields. So far, we think policymakers on both sides of the coin have acted far more swiftly than they did in 2008. 

And the U.S. hasn’t acted alone. Central banks in New Zealand, Japan, Australia and South Korea are injecting liquidity to stabilize markets. Both the Bank of England and European Central Bank have respectively launched quantitative easing programs of their own.

On the Fiscal Front: President Donald Trump last week committed the full resources of the federal government and economy to support businesses and consumers through the coronavirus crisis. President Trump invoked executive powers, promised a ramp in testing, tapped into strategic supply chains, and aligned with corporations to help hospitals and caregivers.

The Senate on Wednesday passed a multi-billion emergency aid package that expands paid sick leave to hourly employees and beefs up unemployment insurance. But that was just an initial volley. Congress is still hashing out a larger, $1.3 to $2 trillion stimulus package. Lawmakers had aimed to vote on the deal today, but it failed to clear a procedural hurdle Sunday night. House Speaker Nancy Pelosi said she plans to move forward and advance another plan in the House.

The stimulus package could include guarantees to airlines, small businesses and additional relief for distressed sectors of the economy along with direct payments and other aid to Americans — perhaps $1,200 per adult. Given Sunday’s step backward, a Monday approval for a stimulus package may be in doubt.

Tax Deadline Extended: Treasury Secretary Steven Mnuchin on Friday extended the tax-filing and payment deadline to July 15 from April 15. Penalties and interest would also be waived on the deferred tax payments until July 15. If you’re expecting a tax refund, Mnuchin urged Americans to file when they can to get their money. 

THE WEEK AHEAD

Unemployment Claims to Surge: This week, the number of Americans filing for unemployment will surge as coronavirus-driven closures and subsequent layoffs are felt throughout the economy. Through the economic expansion, workers on average filed roughly 240,000 jobless claims per week. For the week ending March 14, workers filed 281,000 claims, which was a 33 percent jump from the week prior. We expect this week’s totals to be much higher.

We know what’s coming, and lawmakers do too. That means there’s time swoop in with a cushion to soften the blow for Americans whose livelihoods and businesses were deeply impacted by costly — yet, necessary — social distancing measures.

What’s in the Stimulus Package: After a vote on a larger stimulus package failed Sunday evening, futures fell. But they pushed higher following news about the new Fed action. Markets will be anxiously awaiting the details of the fiscal policy negotiations in Congress to see if it can complement the massive Federal Reserve actions to bridge the economic valley that is being created by the coronavirus.

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