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All Eyes on Congress

The President and First Lady testing positive for coronavirus is a game changer for Congress. We wish them a quick and speedy recovery.

All eyes on Washington. The bandwagon of Fed officials stressing the importance of more targeted fiscal aid continued this week. This is the strongest we have ever heard from Fed officials about fiscal policy.

We’ve discussed in our notes over the past month and a half: 

The Fed is handcuffed short term, has set the table with loose financial conditions. The virus has lingered longer than most expected. In the context of more liquidity to protect against further downside risks, it’s up to Congress. More liquidity is needed short term and although the job market has improved, there’s a long way to go and ominous signs underneath the headlines. Signs of job stress now with bigger corporates a concern and catching the eye of Congress.

The Fed’s campaign for fiscal aid has been unchartered, consistent and coordinated.

From an essay this week: Dallas Federal Reserve President Kaplan:

“While monetary policy will play a critical role in the recovery, we will also need additional fiscal measures that provide relief to the unemployed and those working part time who would prefer to work full time. In addition, fiscal relief would be highly beneficial to state and local governments that are trying to recover from a fiscal hole created in the first and second quarters of this year. Lack of additional fiscal relief would create a key downside risk to my economic forecast for 2020 and 2021.”

U3 v U6: We expect to hear more from the Fed about the underemployed under the revised framework. With Core PCE moving higher this week, all eyes should be on the employment side of the Fed’s mandate moving forward. The structural job challenges are real.

U6 v U3: Expect to hear more and more about the underemployed into 2021.

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Core PCE this Week: Clarida specifically referenced in a Bloomberg interview on September 23.

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The Fed’s short term backseat

With the Fed taking a back seat now coming out of Jackson Hole and followed by their September meeting and endless Fed speak to support the new framework, all eyes for the next 32 days focus on Washington. This morning’s news exacerbating the need to protect downside economic risk as we continue to reopen and battle the virus.

What we have from the Fed is known “lower for longer” and a balance sheet and SOMA account grinding higher each month. The Fed’s balance sheet will continue to grow, yet the “velocity” that drove markets and financial conditions over the past six months has slowed.

The Fed’s balance sheet began growing again in 2019.

Federal Reserve Balance Sheet versus NASDAQ (2016-present).

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A continued safe reopening continues to remain the economy’s best form of stimulus. In the short term, however, we are hearing directly from small, medium and larger businesses alike of the continued struggle with reopening and the virus. Today’s news coming from the White House undoubtedly has the ability to instill fear in the consumer, just as confidence has risen and the job market continues to improve, albeit more slowly.

Today’s headline job numbers continue to show progress. Yet, underneath the surface signs of stress still exist, with some trends flashing warning signs. In all of the Fed’s discussions around the US job market, Jay Powell himself was clear about the place the US job market reached by early 2020: it took 12 years. Time matters here. Pandemics pass. This does not have to be the same employment dynamic we had coming out of the global financial crisis.

U.S. employment permanent job losers

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Markets have stalled and for good reason. To date, financial assets have been largely driven by the contribution of monetary and fiscal liquidity, in conjunction with the demand side of the economy coming back online in June. Certainly, risk assets would welcome a fiscal deal in the range of $1.5-2 trillion.

On the monetary side, financial conditions and liquidity are in a much different place since March. At the same time, the fiscal liquidity has been running dry, tying in with the health side and a timeline that has lingered and challenged the demand side longer than most have expected. This is happening globally.

On the demand and consumer side, consumer confidence numbers have all risen and likely a function of rising asset prices. Over time, consumer confidence and the S&P have correlated well. It’s no coincidence the Federal Reserve is extremely sensitive to financial conditions.

Risk assets have performed during the pandemic. At the same time, for those that don’t have exposure to assets: jobs, wages and income are most important. And this is the dilemma for Congress and the Federal Reserve with the pandemic. It is those at the bottom of the income chain affected the most. That simply requires fiscal support right now.

S&P versus Consumer Confidence (2009-present)

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This week’s personal income and spending

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In the end, the Fed’s “lower for longer” is really not the medicine this economy needs right now. Granted, in the context of disseminating loose financial conditions into the economy for those that can take advantage of them, the Fed has certainly more than quelled unwanted volatility from the early stages of the pandemic.

10-year U.S. Treasury yields versus the MOVE index

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All eyes are now on Washington. Look for long end yields to probe higher should be get a fiscal aid package with long end supply next week.