It Looks Like Policymakers Are Actually Getting It This Time

We believe early action to cushion the initial economic blow of the COVID-19 virus will help limit the damage to the U.S. economy and, eventually, speed the recovery.

U.S. policymakers have responded to the economic crisis triggered by the COVID-19 virus with remarkable alacrity. The Fed introduced a historic level of monetary stimulus, cutting rates to near zero and implementing quantitative easing very aggressively, almost immediately, and has maintained U.S. dollar liquidity by enlarging and extending swap facilities and standing ready to offer unlimited funding via repo transactions. It has also, in conjunction with the U.S. Treasury, established funding vehicles that allow it to provide support in both primary and secondary corporate funding markets, relieved pressure on money market funds, and established facilities to support purchases of asset-backed securities (ABS).

Meanwhile, Congress is on the verge of passing a massive fiscal support and stimulus package that targets households and businesses, and supplies the raw material for even more aggressive actions by the Fed and the Treasury. These will lead to the establishment of more special-purpose vehicles to channel funding to small businesses and, potentially, including asset purchases not covered by existing facilities (such as collateralized loan obligations, high yield debt, private label mortgage backed securities [MBS] and commercial mortgage-backed securities [CMBS], and equities).

The Consumer Canary in the Coal Mine
The urgency behind these dramatic actions is driven by the unprecedented deterioration in economic conditions reflected in the historic rise in weekly initial jobless claims reported on March 26 and the implied historic decline in consumer sentiment in the University of Michigan survey for March, released March 27. While the reported drop between February and March was bad enough (see Table 1), the drop in the later-in-the-month survey responses implied by the difference between the preliminary and final survey results was much worse than any other monthly decline in the survey’s history going back to 1978. The worst decline before this was September-October 2008.

Table 1. A Historic Decline in Consumer Sentiment in March 2020
Changes in University of Michigan Consumer sentiment index values for the indicated periods

Source: The University of Michigan and Lord Abbett. The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. The index is normalized to have a value of 100 in December 1966. Each month at least 500 telephone interviews are conducted of a contiguous United States sample.

In the face of such an enormous and sudden deterioration in economic conditions, it is encouraging that policymakers are operating with a “whatever it takes” mentality. While the ultimate course of the current crisis will be determined by the virus, early action to cushion the initial blow will help limit the damage to the U.S. economy and, eventually, speed the recovery.