FINANCIAL NEWS HIGHLIGHTS OF THE WEEK

United States

• Fiscal policy (or lack thereof) drove much of the news cycle this week. On the same day the Federal Reserve Chair made the case for more fiscal support, President Trump tweeted that negotiations were being cut off.
• Trump changed his mind later in the week, and talks appear to have restarted. Still a deal will require the support of Senate Republicans, and with just over three weeks until the election, time is running out.

 U.S. – Fiscal Deal or No Deal

It was a raucous week news wise and in financial markets. As it has been for the past several weeks, fiscal policy (or lack thereof) was front and center. Arriving back to the White House early in the week, President Trump tweeted that stimulus talks were being cut off and any fiscal package would have to wait until after election. Later in the week he reversed course, suggesting the possibility of standalone bills on specific measures, such as support for airlines, the Payroll Protection Program or stimulus checks. The latest word is that the administration is now pushing hard for a more comprehensive deal.

Assuming a deal can be done between the Trump administration and the House Democrats, it may still have difficulty passing the Senate. On Friday, Senate Majority Leader, Mitch McConnell expressed his doubts, saying he still thought a deal was unlikely over the next three weeks.

For his part, Federal Reserve Chair Powell made a strong case for additional fiscal support in a speech this week. He noted that despite the rebound seen so far, the economy is still in a precarious state. Any slowing in the pace of recovery at this stage risks triggering “typical recessionary dynamics, as weakness feeds on weakness.” It would also exacerbate inequalities, a tragedy in the Fed chair’s view, “especially in light of our country’s progress on these issues in the years leading up to the pandemic.”

In pressing for additional fiscal supports, the Fed Chair noted that there is little risk of doing too much in the current environment. With interest rates falling to record lows, the cost of servicing the federal debt is shrinking even as the stock grows. While the U.S. budget deficit is hardly on a sustainable path – something the Fed Chair also recognized – it has not been for some time. The time will come for hard decisions on the longstanding mismatch between what the federal government takes in revenue and what it spends. However, the near and present risk of cascading bankruptcies and permanent job losses is clearly much bigger than the risk of a future debt crisis.

Indeed, there is much to laud in the fiscal policy response to date. Looking back on the last several months, the success of monetary and fiscal policy in supporting the recovery is everywhere to be seen in the economic data. The support to household income allowed for a swift recovery in goods consumption and production. Retail sales are now higher than pre-pandemic levels – a forecast few would have had a few months ago. While the recovery in service consumption has lagged, this is due to health crisis itself, which makes it impossible to go back to normal in close-contact businesses like restaurants, gyms, movie theatres.

For what its worth, our economic forecast assumed a modest fiscal deal that allows for another round of relief checks and additional unemployment benefits of $300 per week (half the amount under the CARES Act) to be delivered before the end of the year. This still seems possible – the fireworks this week notwithstanding – but if it does not occur, economic growth could get dangerously close to stall speed in the quarters ahead. Activity could still bounce back, particularly if a vaccine becomes widely available by mid-year, but the downside risks are clearly higher the longer it takes for policy makers to reach an agreement.

James Marple, Senior Economist | 416-982-2557

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