Next up: Fiscal Stimulus

In short: With the markets having essentially done the Fed’s work for them (yields for all maturity Treasuries are now below 1%, including 30-year bonds), the next policy change is likely to be fiscal.

Yields on 10Y and 30Y US Treasuries

What could be on the table? The two most crucial aspects of any measure would include a short-term financial cushion for sick workers to support domestic consumption and/or low-interest loans for businesses/industries that are dealing with a loss of demand (and that also have high fixed costs)—a la the airlines. Equally important? Access to coronavirus testing.

What about more rate cuts? Expect to see more easing, even as Fed Chair Powell has stated that “[Rate cuts] won’t fix a broken supply chain…we get that. We don’t think we have all the answers. But we do believe that [last week’s 50 bps cut] will provide a meaningful boost to the economy.” Note that futures markets are expecting an additional 75 bps of easing when the Fed meets at its next scheduled meeting (next week, 3/18/20). I think the markets have gotten ahead of themselves; while 75 bps of easing may be likely over the course of the year, such a dramatic move is unlikely to occur in one fell swoop next week.

Talk is underway over a payroll tax cut, but this will have limited impact on near-term spending. (For one; the impact would only be felt by people who have a job, rather than displaced from work, and would only “trickle” down paycheck by paycheck.)  Instead: Policy makers may look to measures that have been implemented in China, which include subsidies for domestic and international air carriers as well as loan forbearance. (China’s banking regulator has called on lenders not to classify overdue loans as bad debt for companies struggling through the crisis.) While loan forbearance may be difficult to mandate, some banks are taking this optional step: British bank NatWest has begun offering payment holidays and temporary emergency loans to businesses impacted by the coronavirus outbreak. Additionally, some cities are undertaking their own grants: New York City Mayor DeBlasio announced yesterday that businesses with fewer than 100 employees that can document a decrease in sales of up to 25 percent due to the spread of COVID-19 will be eligible for no-interest loans up to $75,000, while small businesses with fewer than five employees will be able to obtain grants worth up to $6,000 to help retain employees. Another policy option could take its cues from Germany: Last night, the German government passed a law allowing for an expansion of its “Kurzarbeit” or short-time work program, whereby government subsidies enable companies to reduce employees’ working hours without having to lay them off entirely. Less likely? Cash handouts, as in Hong Kong, where all permanent residents are set to receive HK$10,000 HKD (or $1,280) due to the joint fallout from the coronavirus and anti-government protests. 

What else?

-While there is unpaid sick leave for most employees via the FMLA, there is no federal requirement for paid sick leave (with the exception of federal contractors and subcontractors.) Look for some measure of stimulus that insures short-term paid sick leave for people who test positive for coronavirus or are quarantined. Note several states and municipalities already have paid sick leave laws on the books, including California, Connecticut, New Jersey Maryland, Massachusetts and Michigan, as well as Chicago and New York City.

-Free coronavirus testing. Already, several health care insurers have waived the cost of co-pays for coronavirus testing, including Cigna, Blue Cross Blue Shield and Aetna. (The flip side is that insurance premia may rise next year as insurers seek to recoup higher 2020 expenses.)  Two possibilities include federal backstops for the cost of all coronavirus tests (including those sent to commercial labs like Quest and LabCorp) and/or the costs associated with enrolling the uninsured in Medicaid during the coronavirus crisis.  (One unknown: what about costs for any coronavirus hospital treatment for the privately insured?) Note that at present, Washington state, California, and New York have mandated that insurers waive costs for insured enrollees in their plans.  

-Meals. For families who receive food stamps (Supplemental Nutrition Assistance Program) or those whose children are enrolled in a Head Start Program or a comparable State-funded pre-kindergarten program, free meals for children are a part of every school day. (Children from families with incomes at or below 130 percent of the Federal poverty level are eligible for free meals, while those from families with incomes between 130 and 185 percent of the Federal poverty level are eligible for reduced price meals that may not exceed a cost of 40 cents for lunch). In FY 2018, an estimated 20.2M free lunches were served daily, as well as an estimated 11.8M free breakfasts. To the extent that there is any coordinated closure of schools on a short-term basis, continuing the school meal program will be critical.