The rapidly evolving Coronavirus pandemic has created a disruption to the global economy in recent weeks with many areas of commerce and trade hitting the pause button. As a result, the US government has responded with unprecedented measures intended to stabilize the financial markets and mitigate the economic damage to citizens and businesses around the country. This response has played out through the action of various entities including the Federal Reserve Bank, the President and Treasury Secretary, and US Congress. Here, Greenwood Gearhart’s Director of Research Johann Komander concisely summarizes the various programs, their purpose, and their potential impact to global markets and the economy at large.
Monetary Policy and The Federal Reserve
On March 15th, as urgency within Washington was ramping up, the Federal Reserve announced emergency actions consisting of a cut in short term interest rates to zero percent, reintroduction of ‘quantitative easing’ purchases of Treasury and mortgage bonds last used in the 2008 financial crisis, and relaxed requirements on US banks. In the following days further actions were taken to backstop money market funds and short-term corporate and municipal debt markets, as well as coordinated action with foreign central banks to increase the dollar supply globally. On March 23rd, with a national wave of shutdowns and layoffs already impacting the economy, the Fed increased these efforts even further, stating that they would purchase an unlimited amount of Treasury and mortgage bonds as well as purchasing government-linked commercial mortgages. This announcement also included new lending programs intended to support the markets for corporate debt, credit card and other types of consumer debt, and a new Main Street Business Lending platform to support lending for small and midsize businesses. The overarching goal of all of these measures is to stabilize the banking sector by injecting large amounts of money into the system and provide government guarantees to lenders of capital across various parts of the economy. In total, the Fed has committed to pumping $2-4 trillion worth of extra liquidity into the market through these actions, an amount equivalent to roughly 10-20% of US GDP, and represents the quickest and most extreme intervention by the Fed in its more than 100-year history.
Fiscal Policy, the White House, and Congress
Throughout this time the President together with Treasury Secretary Mnuchin and members of Congress have worked to pass sweeping legislation aimed at minimizing the economic fallout of the virus. These laws were passed in three different ‘phases’ of increasing size and scope. The initial Phase 1 bill passed on March 6th provided funding for coronavirus tests and critical health agencies such as the Centers for Disease Control and National Institutes of Health. Phase 2 was passed nearly two weeks later on March 18th, as the disease began escalating within the US. This $100 billion bill provided funding for free coronavirus testing, Medicaid and food programs, and improved worker benefits such paid sick leave and increased unemployment insurance benefits.
The most recent phase, known as the “CARES” Act, is a massive $2.2 trillion stimulus measure of unprecedented size and scope and represents direct government intervention in several areas of the economy. The Act can be summarized by its impacts in a few key areas:
Direct Payments to Individuals and Families
Recovery checks of $1,200 per adult with $500 extra per child subject to gradual phaseouts starting at $75,000 for individual filer and $150,00 for joint filers.
Potential Tax Benefits to Individuals
Extends tax filing deadline to July 15, suspends penalties on virus related withdrawals from IRAs, waives Required Minimum Distributions for 2020 and relaxes limitations on charitable deductions.
Education Secretary granted authority to defer student loan payments and honor Pell grants for students who were forced to leave school.
Small Business Administration (SBA) Loans
Federally-guaranteed Paycheck Protection Program (PPP) loans through year end for businesses and non-profits under 500 employees to keep employees on payroll and stay current on their obligations, administered through the SBA’s 7(a) Loan Program. Such loans may be eligible for full or partial forgiveness for funds spent on payroll, rent, mortgage interest, group health insurance premiums, and utilities in the first eight weeks following loan origination, with forgiveness eligibility declining in relation to the number of employees laid off or wages cut. Companies who already laid off workers but rehire them will not be penalized. The Act separately increases funding for SBA’s 7(b) economic injury disaster loan (EIDL) program. While businesses may apply for both types of loans each has separate terms and conditions and businesses should therefore consult with their banker and attorney when applying.
Business Tax Provisions
Deferral of employer 6.2% payroll tax for 1-2 years, five-year carryback of Net Operating Losses, and various other tax modifications aimed at increasing refunds this year. Note: Business may not qualify for payroll tax deferral if they choose to utilize SBA relief.
Support for Distressed Sectors of the Economy
Federal loans to companies in the airline, cargo transportation, and other sectors where the business disruption caused by the coronavirus outbreak has jeopardized company finances. Loans to be overseen by a new Inspector General and must be paid back in time with restrictions on items such as executive compensation and stock buybacks.
Enhanced Unemployment Benefits
Increases benefit by $600 per week and ensures laid-off workers on average receive four months of full pay, including ‘gig’ economy workers.
$150 billion for hospitals and medical facilities including measures to strengthen the US medical supply chain, expedite the review process for needed drugs, and ensure widespread coronavirus testing. An equal amount sent to state and local governments to reinforce their health systems.
As the largest aid package in U.S. history there are many other areas directly impacted by this measure as well, and we are likely to see additional stimulus measures implemented in the coming months as the virus progresses throughout the nation and the economic impact is better understood. Lawmakers have already voiced expectations to this effect. A number of economic indicators will be released in the coming weeks such as new claims for unemployment and changes in GDP which will begin to paint a clearer picture of the economy. Together with a better understanding of the evolving health impact in different parts of the country this will allow financial markets to better estimate when the economy may come ‘back online’. This in turn will allow investors to price assets with better confidence and hopefully reduce volatility in the market.
Director of Research
Note: Given the many moving parts of this legislation, we highly encourage you to seek professional individual consultation on any measures that may apply to you or your business. This outline is based upon legislative information available at the time of review and is not meant to serve as legal or tax advice.