Here's a thought experiment: if Trump tonight said the U.S. was going to give $1,300 to each resident and waive $2,600 from your income tax bill this year to help offset the hit from coronavirus, would bond yields plunge or soar?
My guess is they would soar. Because that fiscal stimulus--which is exactly what Hong Kong is doing to help its economy cope with coronavirus--would certainly help shore up confidence and avoid a deeper GDP hit.
Instead, U.S. Treasury yields right now are plunging. Remember, we never went below 1.3%--ever--on the benchmark 10-year yield until last week. As of this morning, we are barely, barely hanging on to 1%. We went as low as 1.03% before the stock market open.
Why? Because the economic hit from coronavirus keeps growing. Ed Hyman at Evercore ISI thinks we'll have zero GDP growth in the second and third quarter now. A recession, technically, is usually two consecutive quarters of falling GDP, so we're getting perilously close, if he's right. Meanwhile Goldman, which has been relatively upbeat, and rightly so, on the U.S. economy, thinks we'll average hardly more than half a percent growth for the first three quarters.
And that, in turn, has economists forecasting/calling for a big central bank response. Goldman now expects a full percentage-point cut in rates this year, starting with a half-point cut at the March meeting in two weeks. The rest of the street has a similar view now, which we first heard from Bank of America on Friday just before the Fed's extraordinary statement confirmed that kind of action may indeed be coming.
But even Goldman says they don't think cutting rates will actually be that effective a tool in fighting the effects of a coronavirus pandemic. "Central banks may well react aggressively," they wrote, "even if the impact on economic growth is limited." Even if the impact is limited!
Why are we leaning so much on the Fed to respond to this outbreak? They can't afford to mess around with that much rate cutting with the "zero lower bound" rapidly coming into sight. And this is with the underlying business cycle still expanding! What happens when it ends in due course? With hardly any rate cuts left, they'll have to go back to QE, i.e., bond-buying. How many more bonds can they buy? Would equities inevitably be next? Everyone uncomfortable at this prospect--which Japan and Europe are already experimenting with--should hope and press for a fiscal response to coronavirus, not a monetary policy one.
And to circle back to Hong Kong, there is a roadmap for what fiscal stimulus could look like. Their package also includes business relief and a reduction in electric bills, for a total of about 4% of GDP in spending. Not for nothing, this being an election year, if I were President Trump I'd be happy to come out with a nice, juicy fiscal stimulus package.
You can say the U.S. doesn't have "room" for more spending, since we're already running a large deficit. But we really won't have room if the economy tanks in the future and neither the Fed nor the government can do much to help. A little spending now to help people and businesses deal with coronavirus and to make sure the business cycle keeps going is far better than huge spending later on along with major market interference from the Fed.
I'll be sure to press this point with our guests today. Recall, President Obama in 2011 pushed a payroll tax cut that gave people the rough equivalent of an extra $1,000 in take-home pay that year.
I see no reason why we couldn't do something similar right now. And I certainly wouldn't want to buy bonds at these yields if so!
See you at 1 p.m!
Kelly
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