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In his congressional testimony on Coronavirus Aid, Relief, and Economic Security Act, the Fed Chair Powell basically urged for more grants (fiscal stimulus) rather than loans (monetary stimulus/liquidity). Powell tried his best to convince Capitol Hill lawmakers of both sides (RNC-DNC) to agree for CARES ACT 2.0 ahead of the Nov election as most of the vulnerable section of the society and business now needs grants rather than loans. Powell reiterated the economic recovery would depend on the successful containment of the COVID-19 curve.
Powell said U.S. SMEs may need direct fiscal support as Fed is not entitled to lend insolvent borrowers, having no capacity to service/pay back the loan. Powell clearly said there is no lack of liquidity and banks are ready to lend; but there are a severe lack of eligible and quality borrowers, especially during such corona carnage: Our policies will support recovery, but it will go faster for those people if we have the full support of the government.
Powell said in his prepared testimonial text that the Fed is prepared to use all its tools as long as necessary for a sustainable economic recovery. Powell also attributed more than expected economic recovery to the unprecedented fiscal stimulus provided via CARES ACT 1.0 ($3T grants). Expressing concern for those 11M vulnerable people, mainly associated with the consumer-facing service industry, still under full/partial lockdown, Powell said the economic recovery would be fragile if those people can’t rejoin or find alternative jobs. And for that, there is a need for more fiscal rather than monetary stimulus. There is very little demand for a loan under $1M in Main Street Lending Programme.
The U.S. Treasury Secretary Mnuchin also admitted that it can’t provide new aid without Congressional sanction. Mnuchin also assured that despite ongoing cold war tensions, China is on track to fulfill its pledge to buy $36.5B in U.S. agricultural products by the end of the year and he and USTR Lighthizer are very carefully monitoring the progress. Mnuchin also pointed out that President Trump would immediately sign off on additional funds for the PPP. Mnuchin argued again for a more targeted CARES ACT 2.0 economic relief package that would focus on areas of the economy that were particularly hard-hit by the pandemic, like the travel and restaurant industries.
Summary of Section 13(3) Facilities Using CARES Act Funding as on 31/08/2020:
Actually, around 5% of total loans u/s 13(3) was utilized till 31st Aug’20, almost the same levels a few months ago. Thus the Fed has realized that mere loans are not the solution here; most of the stressed SMEs and people now need grants. And thus the Fed has no scope of further stimulus except jawboning (forward guidance). Powell kicked the can down the road for the Capitol Hill and until there is a vaccine, the economic recovery would be fragile even in 2021 due to lack of public confidence and scarring factor.
The Fed will be at almost ZIRP till 2023 to ensure lower borrowing costs for the COVID-19 stimulus, everything being equal but apart from that it’s now almost out of ammunitions except higher QE buying (if further required) and jawboning (forward guidance). And in extreme cases, the Fed may say it’s considering YCC like policy tool to ensure ultra-low bond yields, but at the same time, the Fed also has to ensure attractively return (bond coupon rate) for angel investors (China, Japan, Europe); otherwise who will fund the ‘America Growth Story’?
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