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Another Dose of Fiscal Stimulus?

With Michael Zezas
U.S. Public Policy Research for Investors

The U.S. Congress has been debating ways to flatten another worrying curve: the sliding economic growth curve. What form could additional fiscal stimulus take?

In this Thoughts on the Market series, Michael Zezas offers perspective on how U.S. public policy affects equity and fixed income markets, including trade tensions, infrastructure and government policy. Listen to this week’s update.

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Current Episode Transcript

Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, April 8th at 11:00AM Eastern. 

‘Flattening the curve’ is now part of the American vernacular.  We’re social distancing to avoid a steep increase in the amount of COVID patients, so our hospitals don’t get overwhelmed.

Meanwhile, Congress has been trying to flatten another curve: the economic growth curve.  Facing a precipitous decline in 2nd quarter GDP growth, which our economists think will be more than 30%, Congress passed the $2T CARES Act in the hopes that its emergency assistance to businesses, households, and municipal governments would allow the GDP growth to flatten out and start sloping upward again in the 3rd quarter. 

Will it work?  To answer that question, investors should consider 2 more questions: First, how quickly can the aid make it into the economy? There have been anecdotal reports that small business loans are being disbursed slowly.  And the Fed hasn’t yet announced how it plans to deploy the money Treasury was appropriated to make loans and ease credit markets.  We expect to get real numbers in the coming days as the first weekly reports on a variety of programs come in.  The faster these pools of money get into the real economy, the more it limits the possibility of a slow recovery.

The second question is will Congress deliver another dose of fiscal stimulus?  We think they’re likely to, and see about $1.25T of new spending in play.  First, there seems an appetite on both sides of the aisle for a near term boost to the money within the existing CARES act. Senate Republican leadership and the Treasury both publicly discussed adding another $200-250B to the small business loan pool. Democratic leadership has suggested boosting hospital aid by $100B, and state and local aid another $150B, which as we’ve discussed is certainly needed to limit potential budget cuts, which could further pressure the economy. 

These interim measures are likely to get done, but even bigger spending measures under a 2nd CARES act probably takes more time.  Media reports suggest Congress is discussing an extension of small business loan terms and unemployment aid. They’re also talking about another round of checks to households, with a total price tag of around $1T.  But we wouldn’t expect to know more about the prospects for that larger effort until next month, when Congress is back in session and some of these policies actually approach expiration dates.

In any case, clearer answers to both these questions will be available in the coming weeks as more evidence trickles in.  So stay tuned, we’ll be tracking it and providing you updates right here.

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