HIGHLIGHTS OF THE WEEK
- Markets continued to see losses this week as the COVID-19 outbreak intensified. Investors made a dash for cash, resulting in tightening financial conditions.
- The Fed reacted quickly, cutting the target range of the federal funds rate by a full percentage point to 0% to 0.25% as well as pledging to buy $700 billion in treasuries and mortgage-backed securities. It also launched funding programs to improve liquidity and satiate investor demand for cash.
- In addition, Congress was finally able to pass the Phase 2 response to COVID-19. It will need to quickly follow this up with the $1 trillion Phase 3 package to cushion the impending decline of the U.S. economy.
Markets Plunge, Policymakers Triage
Market turbulence continued this week as the COVID-19 outbreak intensified. As the news of the outbreak worsened, both equity and bond markets saw losses. The S&P 500 fell by 12% from the close last week, while investors made a dash for cash in corporate and bond markets. As a result, financing conditions tightened considerably, with stress particularly elevated in the corporate commercial paper market (Chart 1).
Recognizing the anxiety, the Federal Reserve pulled out a bazooka of policy moves in an emergency meeting over the weekend. It cut the target range of the federal funds rate by a full percentage point to 0% to 0.25%. In addition, it pledged to buy $700 billion in treasuries and mortgage-backed securities. The slew of policy measures also included lowering pricing by 25 basis points on U.S. dollar swap lines with foreign central banks.
Unfortunately, this did not stop financial conditions from further tightening. So, the Fed dug deeper into its toolkit and launched two funding programs: The Commercial Paper Funding Facility, and the Money Market Mutual Fund Liquidity. The programs are intended to improve liquidity and satiate investor demand for cash.
Unlike the Fed, which moved quickly to provide backstops to a faltering economy, the U.S. administration has been slower to act. After deliberating last week and much of this week, it finally enacted “Phase 2” of Congress’ response to the coronavirus pandemic. This $104 billion bill, or roughly 0.5% of GDP, includes free COVID-19 testing, extra funding for food security programs and Medicaid, as well as family and medical leave for workers at companies with between 50 and 500 employees.
This is a good step forward, but more needs to be done, especially for those at the bottom of the income-distribution. Since the outbreak is forcing the shutdown of industries with lower wages, low income households stand to bear the brunt of the COVID-19 impact (Chart 2; see report).
We are already seeing the effects in the economy. Official jobless claims for last week rose by 70,000, larger than any one week during the 2008 crisis. This will move dramatically higher in the coming weeks. In 15 states reporting claims for this week, the number of people seeking benefits was 630,000, roughly in line with the peak month during the financial crisis. It is not unreasonable to expect claims to rise into the millions over the next several weeks.
Understanding the consequences of delaying aid, policymakers are working towards a Phase 3 bill which would provide the support households and businesses need to cushion the COVID-19 impact. Amounting to $1 trillion, the proposals for Phase 3 currently include cash payments of $1,200 per individual, $2,400 to families, with another $500 per child. By easing the financial burden during these difficult times, measures such as this would allow the economy to recover quickly once the coronavirus shock passes. However, time is of the essence. The earlier aid arrives, the better off the economy will be.
Sri Thanabalasingam, Senior Economist | 416-413-3117
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