Given the prospect of a Republican controlled Senate (unless the state of Georgia run-off changes this), Deutsche Bank Research sees its baseline assumption of a US$750bn fiscal package legislated by Q1 as “reasonable” (Canvassing the post-Election Day economic landscape, 6 November)5. This is more than their originally projected US$500bn for this scenario on the grounds that “Senate Majority Leader McConnell has sounded more open to a stimulus deal, indicating that it should be a priority before the end of the year while also hinting at flexibility around support provided to state and local governments – a key sticking point in negotiations thus far”.
This package is likely, the research team adds, to contain an extension of the Payroll Protection Program (PPP), enhanced unemployment benefits, aid for state and local governments, targeted funds for highly impacted industries such as airlines, and aid for schools and health items.
However, in their Konzept article, As labour markets adapt, so too should fiscal policy, Deutsche Bank Research Economists Brett Ryan and Justin Weidner explain that while the PPP and the sizeable expansion of federal unemployment insurance (UI) that supplemented existing state income support mechanisms were “critical” innovations, more of the same is not the best approach going forward. This is because the continued spread of Covid-19 has changed patterns of economic activity, accelerated greater automation of certain functions so that , in their view “the optimal policy mix should shift away from payroll subsidies and towards more income support and job retraining”. In other words, they explain, as the pandemic drags on, “it will be more effective to provide income support to those who may not be rehired than to try to preserve employee-employer relationships that could become obsolete because of structural changes in the economy”.
Federal Reserve QE and economic outlook
In a press conference following The Federal Reserve’s Federal Open Market Committee (FOMC) meeting on 5 November, Chair Jerome Powell said, “As we have emphasised throughout the pandemic, the outlook for the economy is extraordinarily uncertain and will depend in large part on the success of efforts to keep the virus in check. The recent rise in new Covid-19 cases, both here in the United States and abroad, is particularly concerning.”6 He reiterated that the Fed’s “response to this crisis has been guided by our mandate to promote maximum employment and stable prices for the American people, along with our responsibilities to promote the stability of the financial system”. The statement included a reminder that the FOMC aims to keep inflation at an average of 2% over the long run, having shifted its inflation target in late August7.
In the Deutsche Bank Research Fed Notes: November FOMC recap: Awaiting clarity before fine-tuning QE, the team noted that no change looked likely in the QE strategy: “We thought the overriding message from the Chair’s comments on this topic was that asset purchases are working effectively as currently designed, and that the composition and pace of purchases remains ‘appropriate’”. This amounts to the current US$120bn per month (US$1.44trn a year). Powell said the purchases “have materially eased financial conditions and are providing substantial support to the economy”.