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Virus Spikes Threaten The Recovery and Critical Dates Loom, Fed and Congress Seem Ready to Act

All eyes on Washington as positive June data cannot be considered “forward guidance” as July’s numbers will most likely be shaky. Congress reconvenes next Monday for a 3 week session before recessing until Labor Day. Elements of the “final” COVID stimulus bill are taking shape. For example, a 5-year liability shield (2019-2014) for businesses and governments relating to COVID claims, some “targeted” aid to state and local governments and an extension of $600/per week of Federal unemployment benefits that are now set to expire July 31. Note that about 33 million Americans are receiving the Federal unemployment benefits. All of these measures are controversial and contentious. If the unemployment benefit is replaced with a “return to work bonus” from the government, is that putting workers into danger? Ben Bernanke (who knows a thing or two about a financial crisis) strongly urged billions of aid to state and local governments, indicating that there should have been more stimulus to states and cities following the Great Recession.

The Fed is “all in” based on speeches from Fed officials this week. To summarize: “No” on negative interest rates in the U.S. Officials cited, “structural issues”. Possible “Yes” on Yield Curve Control (now being practiced by the Bank of Japan) whereby the Fed buys enough short term treasuries to set a ceiling on the yield. A big “YES” on further asset purchases across the board (Treasuries, Mortgage Backed Securities, and Corporates). There is room for this as the Fed’s balance sheet is actually declining due to lower utilization of its swap lines with foreign banks (a very good sign because that means markets are less stressed). And also, “Yes” to the end of LIBOR remaining on schedule for Jan 1, 2021. Fed Governor Williams issued a robust defense of the replacement index (SOFR) during a speech on Monday to regulators. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners