Another Staggering Week for Job Losses

Plus, the Fed’s new $2.3 trillion plan to rescue the economy

The Fed’s New $2.3 Trillion Plan to Rescue the Economy

The Federal Reserve announced Thursday it would take unprecedented emergency steps to pump as much as $2.3 trillion into an economy and job market that Fed Chair Jerome Powell described as deteriorating “with alarming speed.”

The sweeping new loan programs unveiled by the Fed will draw on the money provided by Congress in its coronavirus relief package to provide additional support for small and medium-size businesses as well as to states and cities facing budget crunches as a result of the pandemic and economic shutdown.

The Fed, backed by Treasury Department funds authorized by Congress, is also expanding its emergency response into riskier new areas it has previously avoided, including municipal debt and some lower-rated corporate debt. The change will allow firms that until recently had been rated as investment grade to access the central bank’s loan facilities.

Under the new programs, the Fed will offer through banks up to $600 billion in four-year loans to businesses with up to 10,000 employees or revenues of less than $2.5 billion. These loans can be larger than those offered by the Small Business Administration.

The Fed will also buy up to $500 billion in short-term bonds from all 50 states as well as counties with at least 2 million residents and cities with more than a million people. “The Fed’s actions are intended to rejuvenate the $3.8 trillion market for municipal bonds and lower the rates state and local governments pay. That should help government agencies avoid more layoffs,” Martin Crutsinger of the Associated Press writes.

Help for ‘fallen angels’: “The reason the Fed had to expand the pool of credit that they are willing to buy is that so many borrowers are slipping into these lower-rated categories,” Mark Vitner, senior economist at Wells Fargo Securities, told Bloomberg News. “This is aimed more at fallen angels rather [than] dastardly devils.”

Nevertheless, Bloomberg notes that the latest Fed action “thrusts the institution into the sort of speculative lending activities it had shunned in the past -- underscoring the risks that Chairman Jerome Powell is willing to take to shore up the economy.”

Powell reportedly indicated Thursday he “won’t hesitate” to move into other areas or adjust the loan programs as needed. “We are deploying these lending powers to an unprecedented extent, enabled in large part by the financial backing from Congress and the Treasury,” he said in a speech following the Fed’s announcement. “We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery.”

Powell added that the Fed is using “lending powers, not spending powers” and that “there will also be entities of various kinds that need direct fiscal support rather than a loan they would struggle to repay.” The Fed, for example, is offering up to $500 billion in loans to states and municipalities, but its new program will not close state budget gaps, according to analysts at Goldman Sachs, who continue to expect that Congress will provide another $100 billion to $200 billion in direct fiscal aid to those governments.

The Fed had already dropped interest rates to zero and launched massive bond-buying programs to keep borrowing costs low and ensure that credit keeps flowing during the coronavirus crisis. The new and expanded programs were unveiled just as the Labor Department announced that 6.6 million Americans filed for first-time jobless claims last week, lifting the total number of job losses to 16.8 million over the past three weeks (see more on this below).

The bottom line: The Fed is going far beyond what it did during the financial crisis and Great Recession, buying a wider range of debt and doing so more aggressively. “The Fed had previously rolled out about $500 billion worth of emergency lending programs, so this could more than quadruple the size of those programs,” Jeanna Smialek of The New York Times writes. And Michael Gapen, chief U.S. economist at Barclays Capital in New York, told Bloomberg: “The Fed has now done virtually everything we think it should be doing and we think it can do.”

Another Staggering Week for Job Losses

Another 6.6 million Americans filed for unemployment benefits last week, bringing the four-week total for initial jobless claims to more than 17 million.

The latest numbers from the Labor Department mean that at least 10% of the U.S. labor force is now out of work, and some experts think the unemployment rate could be several points higher than that, once all of the people who have been unable to file for benefits due to overwhelmed state offices are taken into account.

“So far, jobless claims look to me like the only limitation on the number of applications has been the states’ ability to process those claims,” said Darrell Cronk, chief investment officer of Wells Fargo Wealth and Investment Management.

In a note to clients, economist Chris Rupkey of MUFG Bank said he sees the unemployment rate rapidly heading toward 15%. “This isn’t a recession, it’s the Great Depression II,” Rupkey wrote.

A ‘purposeful sacrifice’: Labor Secretary Eugene Scalia emphasized that the eye-popping unemployment numbers are the product of an intentional effort to slow the pace of a global pandemic, with about 95% of the U.S. population currently under stay-at-home orders. “Today’s report continues to reflect the purposeful sacrifice being made by America’s workers and their families to slow the spread of the coronavirus,” Scalia said in a statement.

Unemployment benefits slow to arrive: The roughly $2 trillion relief package signed into law two weeks ago provides an extra $600 per week for unemployed workers, but state offices have been overwhelmed with applications, making it difficult for millions of workers to file their claims.

Lawmakers are pushing the Labor Department to move faster. “The Department and state workforce agencies have a monumental task ahead in processing these claims,” a group of Senate Democrats said this week in a letter. “But Americans who have lost their jobs don’t have time to wait for a check. People need unemployment compensation now so they can buy groceries, pay rent, and keep up their bills. Without it, many Americans won’t be able to make ends meet.”

More layoffs ahead: As shocking as the unemployment numbers have been so far, economists expect them to move higher in the coming weeks. Michelle Meyer, chief U.S. economist at Bank of America Merrill Lynch, expects to see as many as 20 million job losses by May, pushing the unemployment rate to 15%. Oxford Economics has an even grimmer outlook, with 26 million layoffs and a 16% jobless rate by the end of next month.

Democrats Block Effort to Add $250 Billion to Coronavirus Small Business Funds

A bill that would add $250 billion to the emergency loan program for small businesses hurt by the coronavirus pandemic fell short in the Senate Thursday.

In a nearly deserted Capitol, Senate Majority Leader Mitch McConnell (R-KY) tried to approve the legislation by voice vote, but Sen. Ben Cardin (D-MD) objected to the request, calling it a “political stunt” while noting that the program hasn’t yet run through its initial $350 billion funding. Sen. Chris Van Hollen (D-MD) offered an amendment to the bill with provisions Democrats have been seeking, which McConnell promptly blocked. The Senate then adjourned until next week.

Even if it had passed the Senate, the bill was not expected to pass the House, given Democrats’ interest in new requirements for the small business program, as well as a broader aid package that would add another $100 billion for hospitals, $150 billion for states and a 15% increase to food stamp benefits for low-income households. “The bill that they put forth will not get unanimous support in the House,” House Speaker Nancy Pelosi said Wednesday. “It just won’t.” Pelosi told reporters Thursday that lawmakers still have time to negotiate.

What’s next: The small business relief program has seen tremendous demand and will likely receive a substantial increase in funding. Lawmakers on both sides have reportedly expressed optimism that they’ll be able to reach a deal. When and what the deal might look like remain unclear, though.

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Quote of the Day

“After the dust settles in the U.S. there will be arguments over who should pay for all of this spending and absorb the burdens of the debts, which will be political arguments.”

– Ray Dalio, founder of hedge fund company Bridgewater Associates, in a Wall Street Journal piece looking at the "mountains of debt" both the public and private sectors are taking on during the economic shutdown.

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