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Negotiations over a second stimulus round are underway, ahead of Congress’ early-August recess. News reports suggest President Trump’s team may be looking for a $1 trillion package focused on payroll deductions and support for unemployed workers that does not create “disincentives” for returning to work. By contrast, the House of Representatives advanced the $3 trillion HEROES bill in May. That bill seeks more significant direct cash payments to individuals, aid for states, and other measures. The GOP is expected to release details of its plan over the next few days. Whatever the final number, this will likely be the last COVID-19 legislative action before November and the elections. A $1-3 trillion package will add to the $2 trillion CARES package, enlarging this year’s deficit. Through June, the U.S. ran a 14% deficit relative to nominal GDP, the largest on record (Chart A, below).

Chart A:

Deficit Reaches Record Levels (%GDP)

Cheap Financing to the Rescue

Since March, the debt is being monetized by the Federal Reserve, having purchased $2 trillion in Treasury securities. The purchases are evident by the substantial increase in assets on the Federal Reserve’s balance sheet (Chart B, below). The central bank also enacted a series of capital market backstop programs as allowed under section 13(3) of the Federal Reserve Act. These actions are even more expansive than those taken following the Lehman Brother’s failure in 2008. The significant increase in Treasury debt to finance COVID-19 private sector payments comes at a fortuitous time because interest rates are at record lows (Chart C, below). In essence, another round of borrowing could be made more palatable by meager borrowing costs.

Chart B

Federal Reserve Asset Purchases Exceed Lehman Crisis

Chart C

Record Low Interest Rates Allow Easy Funding of COVID-19 Deficits

Powerful One-Two Punch

The one-two punch of ultra-accommodative fiscal and monetary policy contributed to the market’s 40% rally since March 23. We believe markets response have become conditioned to policy responses, especially following the financial crisis. Therefore, another round of fiscal and monetary support is important for the bull case (along with progress toward a vaccine/treatment, trade, and the election). A jobless rate of 13%, inflation well below 2% are allowing the United States to finance the current stimulus very inexpensively. Therefore, it is unlikely that another round of stimulus will not be forthcoming, but the size and form are up for debate. This week and next should shed light on the next part of the ongoing and massive U.S. COVID-19 stimulus efforts.

Stay tuned!

Kevin R. Caron, CFA
Senior Portfolio Manager
973-549-4051

Chad Morganlander
Senior Portfolio Manager
973-549-4052

Matthew Battipaglia
Portfolio Manager
973-549-4047

Steve Lerit, CFA
Client Portfolio Manager
973-549-4028

Paul Clark, CFA
Senior Portfolio Manager
Municipal Fixed Income
415-364-2635

Rick Marrone
Senior Portfolio Manager
Municipal Fixed Income
415-364-2917

Daniel Urbanowicz
Senior Portfolio Manager
Municipal Fixed Income
973-549-4335

Suzanne Ashley
Internal Relationship Manager
973-549-4168

Eric Needham
External Sales and Marketing
312-771-6010

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