US: An unconventional relief package

August 11, 2020

The US now has over five million confirmed cases of Covid-19, and the virus shows no signs of easing up. On top of the human costs, the financial costs of the pandemic are putting strain on the US economy. The Federal Reserve has taken unprecedented action on the monetary side of things to stop the bleeding, bringing the interest rate to 0-0.25% and embarking on near-unlimited bond buying. On the fiscal front, which is probably a more effective medicine when it comes to helping households weather the downturn, President Trump has taken matters into his own hands after weeks of deadlock on Capitol Hill.

After an initial $1 trillion rescue package, calls are loud for another dose of fiscal stimulus to help support the US’ reeling economy, with unemployment having climbed from 3.5% in February, to 10.2% today. However, the roll-out of relief measures has been on ice, with Republicans and Democrats unable to agree on the shape and form of the package. The Republicans were banking on a $1 trillion price tag, whereas the Democrats wanted this figure tripled. After supplementary unemployment benefits expired last month, the delay put millions of Americans who are clinging onto the side of an “income cliff” at risk of falling off.

With the US Presidential elections three months away, Trump took the bull by the horns and signed four executive orders. Firstly, he extended the emergency unemployment benefits, albeit the value was brought down from $600 per week to $400. The President commented that $600 was too high and had been a “disincentive” for people to return to work. States will have to foot 25% of the bill for this, many of which are already struggling financially after a drastic drop in tax revenues.

He deferred payroll taxes (6.2% for Social Security and 1.45% for Medicare) for people who earn less than $100k per year, he paused student loan payments and interest through December 31st 2020 (but not for those with private lenders), and he took efforts to prevent people being evicted from their homes.

While the package will deliver pain relief in the short-term, Joe Biden, the Democratic Presidential candidate accused Trump of pushing “half-baked” ideas. Further, the legality of the actions are being called into question as federal spending is normally handled by Congress.

Over the next weeks, the fiscal stimulus negotiations in Congress will likely influence sentiment on markets. Signs of progress – in terms of conventional fiscal stimulus –  could lift economic growth expectations.

Author: Group Investment Office