Is the money to deal with Covid-19 running out?

Since March 2020, markets have got used to running on an explosive mixture of central bank money creation, massive government bond buying, and huge fiscal stimulus. But spending is about to slow.

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  1. Charles Stanley

The US led the charge with $3 trillion of new money from the Federal Reserve and a $2 trillion injection through the Coronavirus Aid relief and Economic Security Act. In the UK, we have witnessed a promised £450 billion of bond buying by the Bank of England from March 2020 to end 2021, with £280 billion of additional spending on Covid-19 related matters in 2020-21. There were similar responses in the EU and Japan.

As we approach the likely transition to President Biden, the courts allowing, Cares Act funding comes to an end. It always had on it an end date of 31 December 2020. This year it allowed government to send $1,200 to everyone in the country other than the very well paid, to provide top up funds for local government, and to give payroll assistance and other support to small business. Authority was also given for the Fed to act jointly with the Treasury to lend directly where necessary to the private sector.

Last week Treasury Secretary Mnuchin announced the end of these arrangements. He wrote to the Fed saying:

"With respect to the facilities that used CARES Act funding (PMCCF, SMCCF, MLF, MSLP, and TALF), I was personally involved in drafting the relevant part of the legislation and believe the Congressional intent as outlined in Section 4029 was to have the authority to originate new loans or purchase new assets (either directly or indirectly) expire on December 31, 2020. As such, I am requesting that the Federal Reserve return the unused funds to the Treasury. This will allow Congress to re-appropriate $455 billion, consisting of $429 billion in excess Treasury funds for the Federal Reserve facilities and $26 billion in unused Treasury direct loan funds,”

This marks the end of the two packages, with the withdrawal of special Treasury-backed measures to provide credit to business at the same time as withdrawal of the CARES Act payments.

The West reins in spending

In the UK, the Chancellor announced this week a big drop in planned Covid-19-related expenditures next year, down to a budgeted £55bn.

 In the EU, it is true that next year they get around to raising and spending some of the additional €750 billion they wish to borrow on the EU's own credit status, assuming the December Council reach a unanimous settlement of some tricky outstanding issues. Member states have been busting the 3% budget controls by wide margins but will need to show a bit more restraint next year to comply with the European semester rules.

Assuming Joe Biden wins the Presidency but does not with his party control the Senate it is likely attempts to negotiate another larger fiscal stimulus will take time and will result in smaller sums. The Fed is keen to shift attention to the Congress and the budget but may well come under pressure into the new year to take some offsetting action to the slowing effects of the end of CARES money.

Janet Yellen at Treasury Secretary has much experience of how the Fed works and will know how to move it in the direction Mr Biden and she wish. Jerome Powell as Chairman of the Fed will be conscious that he was a Trump appointee and will need to woo the new Administration to be able to work smoothly with it.

Markets see Janet Yellen as a force for stability and good, but she will be adjusting to becoming a senior Democrat politician and will be much closer to the President. She may be a behind the scenes dove and influence on the Fed. So far, there is no Biden economic vision on these matters, and a raw Senate of angry Republicans trying to handle President Trump. They need him to help garner votes in Georgia for the two Senate seat run-offs, but some of them worry about his stance on the election result as they seek to woo moderate Democrats.

Markets are going to have to get used to less fiscal stimulus next year than 2020 yielded, with more worries about deficit reducing measures to come. The expiry of the CARES Act will be quite a jolt to the system. Markets have had their big run up on the back of better vaccine news and now need to digest the reality that this winter is going to tough going for many businesses.

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