The Inevitable Need for More Stimulus From Washington
Author: Greg Valliere
March 30, 2020
THE DEEPENING CORONAVIRUS EPIDEMIC, now rapidly infecting the entire world, will almost certainly require new fiscal and monetary stimulus from Washington. All options are on the table — even, some analysts think, the Fed buying equities.
THE MAGNITUDE OF THIS CRISIS was finally conceded by Donald Trump last night; to his credit, he’s far ahead of many congressional Republicans, who are reluctant to commit to more stimulus. Much more will be required.
THE GRIM NUMBERS cited by Dr. Anthony Fauci have stunned Trump and his top aides, who soon will push for another rescue bill, focusing on more aid to state and local governments, which are running out of money, and providing even more money to backstop the Federal Reserve, which is prepared to throw everything imaginable at reeling markets.
AROUND THE COUNTRY, the heroes are medical personnel, risking their lives in hospitals that are ill-equipped. In Washington, the hero is Fed Chairman Jerome Powell, who is thinking outside the box.
POWELL HAS CREATED five new lending facilities, some resurrected from the 2008 crisis, with more assistance to come for businesses and state and local governments, perhaps through new facilities that will need Treasury Department approval, which is certain.
THERE ISN’T MUCH MORE THE FED CAN DO ON INTEREST RATES: Negative rates have little support within the Fed, although our friend Don Kohn — the former Vice Chairman — told us recently that the central bankers may adopt a “forward guidance” for the fed funds rate that would prevent the markets from building in any distant rise in rates, when the central bankers aren’t ready for that.
ON LENDING FACILITIES, the Fed “is only limited by the ability of Treasury to put in
loss-absorbing capital, and the new bill gives Treasury a huge pot for that,” Kohn
HOW BOLD COULD THE FED BECOME? In a piece this morning on CNBC’s web site, Jeff Cox quotes several analysts who think the central bankers might consider the once-unthinkable: buying equities if stocks plunge once again. Congress would have to approve such a radical move, and lawmakers surely would ask questions about how new asset stakes eventually would be unwound.
IN THE MEANTIME, the Fed will focus on triage, such as a fresh crisis in the mortgage-backed securities industry, which had benefited from a hedge that has blown up in recent days. As Steve Liesman reports on the CNBC web site this morning, the unwinding of that hedge has led to margin calls that could stagger that industry.
OUR BOTTOM LINE is that this is a period of unprecedented triage, with all options on the table. New legislation passed by Congress late last week gives the Fed a de facto $4 trillion lending backstop from the Treasury, and Congress could approve
more by summer in a fiscal bill that would renew unemployment benefits and aid state and local governments.
WE’RE WATCHING THE DAILY NUMBERS — now leveling off in Italy and hopefully in Spain within a week, but probably not in the U.S. for another two or three weeks. There’s still no imminent medicine for the virus, but the fiscal and monetary medicine will be extraordinary. The sky’s the limit.
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