Powell and Mnuchin Expected to Promote Stimulus in Congress

• Fed Chairman Powell and Treasury Secretary Mnuchin to appear in House and Senate.
• Additional pandemic stimulus has been stalled in Congress for more than a month.
• White House has urged compromise between Democratic and Republican proposals.
• Fading stimulus is one factor behind the equity decline this month.
• Dollar has edged higher as risk aversion rises without US economic support.

Federal Reserve Chairman Jerome Powell and Treasury Secretary Steven Mnuchin will be in the unusual position this week of advocating for more stimulus spending before the Senators and Representatives that have blocked additional relief for more than a month.

Tuesday’s hearing at the House Financial Services Committee will give the White House and the Fed another chance to convince lawmakers that further fiscal efforts are needed to keep the US recovery on track.  The double appearance is required by the original relief bill, the Cares Act, passed in March.

Pandemic relief

That $2 trillion pandemic bill  has been instrumental in returning employment and  economic activity from the record 31.7%  drop in annualized GDP in the second quarter.  Its impact is now fading, especially as the additional $600 a week in federal unemployment insurance expired in July.  

Lawmakers have been deadlocked for weeks over the amount and composition of the fiscal recharge with Democrats pushing for a $2.2 trillion package with large provisions for local and state budgets and most Republicans behind a $660 billon bill, emphasizing incentives for people to return to work.

Fed and Treasury advise support

Mr. Powell has maintained from the beginning of the Fed’s involvement in early March when it cut rates, restarted quantitative easing and opened a business loan program, that monetary policy and Fed actions would not be enough to return the economy to full health.  Generous spending and support from the government were essential.

That message was repeated after last week’s FOMC meeting.  “More fiscal support is likely to be needed,” he noted.  “The path forward will depend on keeping the virus under control, and on policy actions taken at all levels of government,” he said.

Secretary Mnuchin, who has been the administration’s chief negotiator with the Democratic controlled House where most of the disagreement lies, also favors more funding for industries like travel, hotels and restaurants that have had only limited recoveries.

“Now is not the time to worry about shrinking the deficit,” he told CNBC recently.

The Republican controlled Senate is likely to go along with whatever deal is reached between the administration and Nancy Pelosi, the House Speaker.  President Trump has suggested that the two sides could split the difference in a final arrangement.

Powell and Mnuchin will also give Cares Act testimony to the Senate Banking Committee on Thursday, and the Chairman  will report to the House Select Sub-Committee on the Coronavirus Crisis on Wednesday.

Stimulus and markets

A second stimulus package had been considered a near certainty by the markets and was one of the reasons behind the powerful run higher in equities. From March 23 to September 2 the S&P 500 gained a remarkable 63.7%.  Even with the 8.5% drop from the peak to Monday’s close at 3281 the average is but 3.3% below its pre-pandemic high of February 19 of 3393.

CNBC

The dollar has seen a modest revival against most majors as worries about the strength of the US economy without stimulus have weakened equity markets and rising COVID-19 rates in Europe have brought on a mild case of risk-aversion.

After briefly crossing 1.2000 on September 1 the euro had fallen back to 1.1771 by the close on Monday, at the bottom of its two month range against the dollar. 

The sterling was also at an eight week low while the USD/CAD closed above 1.3300 for the first time in six weeks.

The yes has strengthened, closing at 104.65 on Monday, as its traditional safety role for Asian markets has received a small fillip.

Chairman Powell's views on the US economy are well known. Since his purpose is to encourage more stimulus spending he is unlikely to be overly optimistic about the US economy.  Still, he is the chairman and any unexpected remark could be a market event.  

Business and government loans, unemployment

Powell will be questioned on the Fed’s $600 loan facility for small and mid-sized business, whose funding was provided by the Treasury but has seen only $1.5 billion in loan purchases by the central bank.  When the program began in March scarce liquidity was a problem in some credit markets but availability has long since returned to normal.

Loans and support for local and state governments will likely be another topic of contention by questioners. Democrats have advocated direct aid to states and localities while Republicans have largely opposed the idea considering it a bailout for badly managed local authorities.  The central bank’s municipal facility has only purchased two loans to date.

Unemployment has come down rapidly from May’s 14.7% high to 8.4% in August. The additional Federal unemployment insurance of $600 a week expired in July and the two political parties have been unable to agree on a continuation.  President Trump extended the program at a lower level of benefits by executive order but the funds for that are running out also.  The Paycheck Protection Program which provided money to help small business with payrolls is also finished. 

With many small business struggling and initial jobless claims still being filed at close to one million a week legislators will want to know what other measures might help alleviate individual difficulties and assist the economy.