The Monetary Credit and Fiscal Responses to the Pandemic

Dear Reader,.

​Chapman hosted an economic webinar Thursday, June 18th to discuss the monetary credit and fiscal responses to the pandemic. They had many panels of speakers ranging from the President of the Federal Reserve Bank of St. Louis to economic professors at MIT and Dartmouth College. The common themes between all the panelists are fear, uncertainty, this event is unprecedented, and it not being a V-Shaped recovery. Some agreed that the Feds made the right choices in their monetary and fiscal policies, but others had mixed feelings and felt that the Feds could have acted differently (bringing rates to negative). Here are the key takeaways:
 
Where we are now in the monetary and fiscal world is in unchartered waters and the current goals of the Feds are to mitigate a financial crisis and to mitigate depression risk. So, the Feds will do whatever it takes. Their current policy response comes in three ways:

• Health Policy:
  • Workers are asked to stay at home. About 47 million workers in the labor force are in high-concentrated areas/professions where they are in contact with large amounts of people. Currently, there is around 45.7 million cumulative jobless claims so they are predicting this will max out around 47 million.
• Fiscal Policy:
  • Unemployment insurance with the added bonus of $600 per week.
    • From my own experience (and not the first-hand experience of where I am getting unemployment benefits), many people are taking advantage of this by being employed and still getting this, are unmotivated to return back to work, and the government will pay anyone this even though they may be cheating the system.
  • PPP for small businesses.
  • Direct cash payments to households in the form of $1,200.
• Monetary Policy:
  • Fed liquidity programs.
  • Changing the Fed rate to the lower bound and holding it there.
  • Buying corporate bonds and corporate bond ETFs.
  • Swap lines with Central Banks around the world.

 
The Cares Act essentially spent 10% of the US GDP to fund some of these policies. The prediction is the 2020 GDP will be 10% lower than 2019 GDP levels. But there will be more fiscal policy going forward because the stock market is being propped up by it, and society is relying on it. Unfortunately, this can not be maintained over a long period of time. The Feds estimate that, because a typical small business can not last 90-120 days without revenue, this is how long it will last.
 
One economist created illustrative scenarios to predict what may happen in three different ways.

• Baseline Scenario- partial but incomplete rebound this year, with employment still well below its pre-pandemic peak at the end of the year.
• Benign Scenario- an effective vaccine or antiviral medicine arrives soon, and the economy returns to its trend path next year.
• Severe Adverse Scenario- the ongoing threat of infection causes widespread business closures and credit defaults, triggering an adverse feedback loop between the economy and the financial system.

Risks: The issue now is mortality risk is rising due to a second wave approaching or the first wave expanding. The other risks include higher inflation. What we experienced was an abrupt collapse in aggregate demand and supply resulting in insufficient demand. Once all of this stimulus money is put to work in the economy, we will see inflation.

The Feds are currently buying corporate bonds and corporate bond ETFs (regardless of their credit rating). For example, they bought an ETF fund (SPDR Bloomberg Barclays High Yield Bond ETF) composed of high yield corporate bonds… junk. Some say the Feds are going to start buying equity in the stock market. Are the Feds picking winners and losers? Will the Feds hold these corporate bonds to years to come? Will they become majority shareholders with controlling interests and voting rights? Who will they send to represent them at the shareholder meetings?




Keep Climbing,


The ACA Foundation ​