The Government Response

I hope this Market Commentary finds you and your family healthy and well.  For this week’s Market Commentary, I have excerpted a portion of the upcoming FarrView newsletter that we send to clients every quarter. The FarrView will be available in its entirety next week on our website at:  The FarrView .
Of the thousands of times I’ve sat at my keyboard to write about investing, economics, and markets, I’ve never faced the complexities of a pandemic and elective economic contraction.  Deep concerns about the safety and well-being of family, friends, clients, and employees occupy much of my thinking and worrying.  Parsing through the evolving health crisis details and eroding economic and business environment fills the balance of my waking moments.  All of you are in our thoughts and prayers.
Focusing on what we know and what we don’t know need to guide our dispassionate decision making.  We don’t know when the impact of this virus will reach its zenith, and we don’t know how long very high morbidity and mortality numbers will last.  We don’t know how long social isolation and business shuttering and closure will last.  We don’t know how effective the economic response from government will be.  We don’t know how long it will take for businesses and the economy to restart.
We know that the banking system in the US was healthy and liquid at the onset of this crisis.  We know that this emergency was not caused by speculative excess or some other type of financial bubble.  We know that health care experts believe that this crisis will pass as this virus follows the historical trajectories of others in its class.  We know that at present, the numbers of infected people in the US are increasing, unemployment is increasing, and stock markets are extremely volatile.
We are entering a period in economic history that is unlike any before. During the financial crisis of 2008/09, the government and the Federal Reserve went to great lengths to keep the economy from seizing up following what was, in a real sense, the collapse of the financial system. In the coronavirus crisis, we have intentionally stopped the economy – precisely what we were attempting to avoid happening a dozen years ago – and as the pandemic recedes we will face the daunting task of restarting.
The Federal Reserve, under Chair Jerome Powell’s leadership, has taken a “whatever it takes” approach to ensuring that financial markets will still function through the economic stoppage.  Most obviously, the Fed lowered interest rates by 1 ¼% to effectively zero in two emergency meetings twelve days apart.  Additionally, the Fed has resumed Quantitative Easing, including purchasing of mortgage backed securities, and has established a plethora of new lending facilities including commercial paper, primary market corporate, and money market liquidity facilities.  The net effect of all of the Fed’s actions is to ensure that financial and capital markets will remain liquid so businesses and lending institutions can endure the downturn.  Functioning capital markets will be a necessity as the pandemic abates and “The Great Restart” of the economy begins.
Former Federal Reserve Chair Janet Yellen this week stated that our current unemployment rate is likely over 12%, and the jobless claims data over the past three weeks certainly support her contention.  She said she expects the number to increase, and that the total decline in GDP for the second quarter may be as much as 30% on an annualized basis. That her comments were not seen as shocking is a testament to how serious the situation is.
Congress and the President, for their part, have stepped up on the fiscal side of the ledger as well.  Three stimulus bills were passed in quick succession; the third, the CARES Act, provides up to $2.2 trillion in assistance funding a range of programs, such as: small business loans, direct grants to impacted businesses and industries, public health services, direct relief for states, and direct stimulus payments to individuals. There is already talk in Washington that more needs to be done, and serious discussions are underway. What is clear is that the federal government’s resources and attention have been given over to the problem – first to preserve life and public health, but also to the economic well-being of the country.
The massive programs from both government and the Federal Reserve will not come without consequence, and it is certain that not all of the programs will work as intended. It is clear, though, that the government is doing what it can.  The powers that be appear willing to do what is needed to sustain the country through these difficult times.
We hope you all remain safe and healthy.