‘Unprecedented’ is rapidly becoming one of the most reached for words this week as the world charts an unknown course and countries desperately try to shore up their economies and protect their populations fiscally in a war that has both an invisible enemy and an unknown end date.
As social distancing measures take their toll, with shopping malls empty, production plants at a standstill and aircraft grounded, the economic costs are mounting with White House economic adviser Kevin Hassettsaying that the United States could face a repeat of the Great Depression.
On Sunday night, Congress failed to reach an agreement on a massive $2 trillion stimulus package, and the stock market looked set to plunge in reaction when it opened on Monday.
To stave this off, the US Federal Reserve effectively wrote a blank cheque, with the central bank stating that the Federal Open Market Committee will place no limits and buy Treasury securities and mortgage-backed securities in “the amounts needed to support smooth market functioning” – an extension of last week’s announcement where it committed to buy only $700bn worth of bonds. This new move represents an open-ended commitment to Quantitative Easing – as at least one economist has put it: “Don’t ask how much they will buy, this is truly QE infinity.”
The Fed will also expand into corporate bonds, buying commercial mortgage-backed securities.
Having already slashed its interest rate to near zero, other initiatives include two lending facilities for large companies – the Primary Market Corporate Facility for new bond and loan issue, and the Secondary Market Corporate Credit Facility to provide liquidity for existing corporate securities; plans for a Main Street lending programme for small and medium businesses, and therevival of the Term Asset-Backed Loan Facility that was implemented during the 2008 banking crisis to support the flow of credit to consumers and stave off liquidity crises for businesses.
In a statement, the Fed said: “While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”
Corporate America already has a massive debt load – with extremely low interest rates on offer US business has borrowed heavily since the financial crisis. The Fed’s intervention into the debt market underscores fears that the economy is in a steep nosedive. “We are committed to providing relief for American workers and businesses, particularly small and medium size businesses and critical industries that are most impacted by the coronavirus. We will take all necessary steps to support them and protect the U.S. economy,”Treasury Secretary Steven Mnuchin said in a statement, as yields fell on Monday with investors retreating to safe-havens.
Stocks also fell in Frankfurt, Paris and London as markets tumbled, with only the Japanese Nikkei gaining after announcements that the Olympic Games will be postponed.
With the balance sheet already over-extended and interest-rates at rock bottom, the Fed has little left in terms of policy tools to combat a massive economic downturn. This won’t be helped by the angry scenes in Congress as Senators clash over delays to the spending bill which failed to pass on Sunday night.
The Senate Majority Leader, Republican Mitch McConnell accused the Democrats of holding up the bill in order to secure provisions for special interest groups and unions. Democrats argue that the legislation is too focused on corporations and not enough on ordinary workers and the healthcare sector.
The Bill aims to pump money into the economy to avoid layoffs and a contraction in consumer spending, providing $1,200 per adult and $500 per child as well as a $500 billion lending programme for businesses and cities and $350 billion towards payroll costs for small businesses.
It is this $500bn lending programme that disturbs the Democrats who have labelled it a ‘slush fund’ and dislike the control the Treasury Dept will have over which businesses receive loans. President Trump responded to the criticism on Sunday saying “I don’t want to give a bailout to a company and then have somebody go out and use that money to buy back stock in the company and raise the price and then get a bonus… So I may be Republican, but I don’t like that. I want them to use the money for the workers.”
As businesses flag up the scale of problems they are starting to face, and the country confronts the possibility of millions of lay-offs if help isn’t received soon, there is increasing urgency and the eyes are all on Capitol Hill as attempts are made to pass the Bill on Monday.
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