March 30, 2020

Responding quickly to the accelerating stress resulting from the Covid pandemic, Congress and the Fed have each undertaken a series of initiatives to restore America’s economic and financial momentum. More specifically, Congress has focused on assuring solvency for households, corporations and other vital organizations. In turn, the Fed has acted to maintain sufficient liquidity throughout the financial system. In this note, The Mather Group would like to provide a quick summary of several key elements of these initiatives.

Unlike the conditions underlying the 2009 Great Recession, Congress has faced an economy shrinking rapidly due to business closures and soaring unemployment resulting from stringent public health initiatives. Its bipartisan effort, the Coronavirus Aid, Relief and Economic Security Act (CARES Act), will offer $2.14 trillion of rapid outlays. By comparison, the combined amount of funds disbursed by Congress during the Great Recession totaled just $1.64 trillion, or about 77% of the CARES Act amount. This amount equals about 11% of our nation’s current GDP, and the sum actually exceeds the entire GDP of countries such as Brazil, Canada, Italy or Russia. On any dimension, CARES Act outlays are quite significant, and Congress has stated its willingness to add to these funds if the economy weakens further.

Using the graphic shown below, let’s examine some of the highlights of the CARES Act.

Bailout and stimulus

For households, the CARES Act offers $551 billion in immediate support, consisting in part of $250 billion in augmented unemployment income. These funds include not only traditionally covered employees, but those who are self-employed, seeking part-time employment or independent contractors (gig economy workers). Employees who face restrictions due to their Covid infection or who are otherwise quarantined are also eligible.

A further $301 billion will be disbursed directly to individual household members, including children, with these funds intended to offset recent, sharp declines in household spending. The Tax Foundation estimates that these funds will increase after-tax incomes for all US households by 2.59%. Households will benefit as well from delayed filing of Federal tax returns and payments, with many states offering similar relief. Student loan payments will be deferred as well until September 30th, and early withdrawal penalties from qualified retirement plans are waived. The Mather Group Tax Team will be providing a more detailed summary of these provisions shortly.

Businesses received a mixture of direct loans and grants. Airlines, for example, have been forced to idle aircraft as schedules were cut 80% or more due to international and domestic flight restrictions, passengers becoming fearful of infection and the cancellation of numerous events. As a result, airlines such as Delta saw their stock fall 70% from their January levels as the pandemic unfolded. So, airlines will receive $29 billion in loans and $32 billion in grants to maintain their infrastructure until the economy recovers.

Small businesses will be offered $350 billion in forgivable loans, intended to keep their employees on payroll by offering payroll tax offsets. Loan amounts will also be forgiven if the funds are used for utilities, rent, mortgage payments and other business expenses. Larger corporations received a number of tax adjustments, credits and deduction limitation changes as well. Corporations also were included in a $459 billion loan package, but with limits placed on employee layoffs, executive compensation and stock buybacks. This loan package will be managed by a multi-member oversight commission and special inspector general.

In the public sector, states and local governments would participate in a $150 billion grant package to offset Covid-related expenses. They would also be eligible to participate in the $459 billion loan package, along with corporations. Finally, hospitals and the VA would participate in a $117 billion grant to offset supply shortages, unrecovered costs from treating Covid patients, to provide support for virus drug research and to strengthen Medicare and Medicaid coverage.

The Fed has launched parallel initiatives to counter the Covid pandemic. During the Great Recession, the Fed was focused solely on maintaining the solvency of the US financial system. In its aftermath, regulatory changes were enacted to assure that far greater levels of capital were held by financial institutions. Thus, the specter of another Lehman Brothers occurring appears greatly reduced, which has allowed the Fed to shift its focus instead to liquidity strains occurring in our financial network.

More specifically, many of the securities which are traded daily among financial institutions, such as Treasury bills, commercial paper, corporate bonds and money market funds, faced limited demand and pricing disparities recently due to institutions unwilling to commit sufficient capital to support these transactions. This is a primary source of the emerging liquidity crisis confronting the Fed.

In response, the Fed has launched several dramatic initiatives, totaling several trillion dollars in addition to these CARES Act outlays, which will inject more liquidity into the system. For example, it has reduced its benchmark Fed funds lending rate to zero, and eliminated its bank reserve requirements, freeing an additional $2 trillion to be redeployed through immediate bank lending. The Fed also relaunched its prior Quantitative Easing program, promising to buy an unlimited number of Treasuries and mortgage securities, and which has already purchased $750 billion to date.

It has also established five so-called Facilities, each intended by the Fed to purchase individual securities facing current liquidity strains. These Facilities are backstopped by the Treasury, and will purchase corporate bonds, corporate bond ETFs, money market funds and commercial paper. The Fed is also constructing a “Main Street Business Lending Facility” to assure that small and medium-sized businesses have continued access to working capital through business loans.

For straining households, these actions by the Fed assure continued access to personal credit at attractive rates. For example, Fed cuts to its Fed funds rate and its Treasury bond purchases have already lowered recent mortgage borrowing costs to 3.47%, the lowest 30-year fixed-rate mortgage since August 2016. Another of its Facilities, the Term Asset-Backed Securities Loan Facility (TALF), allows financial institutions to resell consumer credit exposures to the Fed, such as auto loans and leases, student loans and credit card receivables, which will free significant funds to be relent again. This Facility will also fund business loans guaranteed by the Small Business Administration, so that major corporations are not the only beneficiaries of these Fed initiatives.

The Mather Group continues to believe that the fundamental strength of the American economy and our financial system, despite this pandemic, remains strong. It may take several Quarters or more to regain its prior momentum, but this interlude should not deter clients from staying focused upon their retirement goals and their personal financial plan. Even in the midst of these unexpected blows to our economy and our public health, we might remember the words of Winston Churchill, offering optimism in the depths of World War II, “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” Please reach out to The Mather Group’s professionals if you have further questions or issues for which we want to offer our support.

The opinions expressed, and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on The Mather Group’s research and professional experience and are expressed as of the publishing date of this communication. The Mather Group makes no warranty or representation, express or implied, nor does The Mather Group accept any liability, with respect to the information and data set forth herein. The Mather Group specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice nor is it intended to provide comprehensive tax advice or financial planning with respect to every aspect of a client's financial situation.

Sources: Wall Street Journal; Tax Foundation; The Federal Reserve Board of Governors; the St. Louis Federal Reserve Bank; The World Bank; Congressional Budget Office; Bloomberg; Fannie Mae; Internal Revenue Service


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