The Data Start to Roll In & The What and Why of Stimulus – March 30, 2020

We are beginning to get an early read of how the economy may fare amid government-led shutdowns and social distancing.

On Thursday, the Dept of Labor reported weekly first-time claims for unemployment insurance surged from 282,000 to 3.28 million, exceeding the previous record set in 1982 of 695,000.

Businesses have been furloughing workers at a frantic pace, especially small businesses that require face-to-face interactions.

While Thursday’s report exceeded expectations, the number likely would have been higher, but many state computers were jammed by the massive number of filers that simply couldn’t file.

It’s an important reason why Congress and officials at the Federal Reserve have been scrambling to craft a credible response that softens the economic blow and sets the stage for an eventual economic recovery.

Free markets vs government intervention

The short-term economic impact will be enormous. Never have we seen such widespread closures in the U.S. economy. Some may believe that massive intervention by the Fed and the federal government are inconsistent with free markets.

However, we are facing unprecedented challenges today.

Many are complying with government mandates to stay at home. Other businesses are simply following government-ordered shutdowns designed to slow or prevent the spread of the virus.

In a blog last week, St. Louis Fed President James Bullard put it this way. “The productive capacity of the U.S. economy is fundamentally strong and resilient—nevertheless, this organized ‘throttling down’ radically changes the way we need to think about and gauge the health of the U.S. economy in the near term.”

Therefore, it seems reasonable for the government to support firms and employees who are simply following government edicts.

Monetary policy vs fiscal policy

There are two levers being used: monetary policy and fiscal policy. They are separate but are designed to complement each other.

What is monetary policy? Monetary policy is implemented by the Federal Reserve. Raising or lowering interest rates is the primary tool used by the Fed. However, rates are at zero. So, the Fed has implemented several unconventional programs to keep credit markets working, hoping to limit the economic downside and set the stage for an economic upturn.

These include massive Treasury bond buys, programs to support investment grade corporate bonds, municipals, money market funds, and more. The magnitude is unprecedented and goes well beyond what we saw in the financial crisis.

The Fed has also established a Main Street Business Lending Program (MSBLP) to support lending to eligible small-and medium-sized businesses. Backstopped by the Treasury Dept., the MSBLP is critical and must function efficiently. It’s designed to provide cash to companies that keep employees on the payroll or pay for sick time. Details are just beginning to emerge.

What is fiscal policy? Fiscal policy is crafted by Congress and must be signed by the president. Congress passed a $2 trillion package that will provide tax rebates to most individuals, grants and loans to struggling businesses, expanded unemployment benefits, and much more.

Simply put, fiscal policy is spending and tax relief designed to soften the economic blow from the epidemic and help jumpstart an eventual economic recovery.

Will it work?

Policymakers learned an important lesson from 2008. During the financial crisis, support was focused on banks and the automakers. However, many on Main Street resented what they saw as bailouts to financial institutions they viewed as the cause of the crisis. Today, the policy response has been much stronger, and it casts a much wider net.

Whether the stimulus is sufficient remains to be seen. It depends on the path of the virus and the economic lockdown, which will both influence the duration and severity of the recession.

The Fed’s actions and the fiscal stimulus package helped stabilize markets last week. The package passed by Congress won’t satisfy everyone, but coupled with measures taken by the Fed, they aided stocks last week. They will also inject much-needed cash into the economy.

Created 2020-03-30 14:30:48