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How Latest Relief Package Could Help U.S. Economy

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It was what financial markets had been waiting for and the catalyst for the recent rally in U.S. stocks. But by the time news broke that Congress had finally reached agreement on a second economic relief package, stock and bond prices were falling, though the Dow Jones moved into positive territory late Monday.

News of a fast-spreading strain of the coronavirus in the United Kingdom, Denmark and South Africa revived worries about the global economic recovery and overwhelmed the positive impact of the $900 billion U.S. economic relief bill.

Still the fiscal relief package should “provide some relief” for the U.S. economy, whose recovery is already slowing down because of the “resurgent pandemic” in the U.S., wrote David Kelly, chief global strategist at JPMorgan Funds, in his weekly outlook 

Kelly was referring to the growing number of infections, hospitalizations and deaths in the U.S. due to the COVID-19 virus, which has persisted well before the latest news from the U.K. 

The relief package reportedly includes $600 checks per adult or child below certain income levels, an 11-week $300 enhancement to weekly unemployment benefits along with extended unemployment benefits and and close to $300 billion in new forgivable Paycheck Protection Payment loans with expanded coverage.

In addition, there’s a month-long extension for the moratorium on eviction to Jan. 31, 2021, $25 billion in rental assistance and tens of billions of dollars for schools, for the purchase and distribution of vaccines and enhanced testing and for airlines and transportation infrastructure. 

Businesses receiving PPP loans that have been forgiven reportedly will be able to deduct businesses expenses paid from those loans, which the IRS had previously disallowed.

The “short-term nature” of the relief package, however, “underscores the need for a further relief package in the new Congress,” wrote Kelly.

Views of Moody’s Zandi

Mark Zandi, chief economist at Moody’s Analytics, said the relief plan is coming “just in time” for the U.S. economy whose recovery is flagging as evidenced by rising unemployment claims, sagging retail sales and renewed restrictions on businesses due the expanding pandemic.

He expects the latest fiscal rescue package will add about 1.5 percentage point to annualized real GDP growth in the first quarter of next year and close to 2.5 percentage years to 2021 growth.

“If lawmakers had not come through, the economy probably would have suffered a double -dip recession in earlier 2021 [and] unemployment, which is currently 6.7% would have risen to almost 9% by mid-year,” wrote Zandi in his “This Week in the COVID Crisis” report.

Congress is expected to vote on the relief package sometime Monday, hours after members received a 5,593-page document that combines the roughly $900 billion pandemic relief with a $1.4 trillion bill to fund government operations through the end of the fiscal year.  Also included are major tax, energy, national security policy measures.

One sticking point that had been delaying an agreement was a provision that would require Congressional approval for the Federal Reserve to to develop and use lending facilities to address an economic downturn, as it has done during the current COVID-19 crisis.

The final language of the relief plan reportedly modifies that limitation by allowing the Fed to set up similar, but not exact replicas, of current emergency lending programs without congressional approval. It does, however, end any funding that the U.S. Treasury had allocated for the Fed’s lending facilities but has not been spent.

Both Zandi and Kelly expect lawmakers and the Fed will find a way to work around the new restrictions if such lending facilities are needed in the future.

“During a crisis people figure that out pretty fast,” Zandi told Think Advisor, noting, however, that a policy to hamstring the Fed is misplaced 

The Fed functions as “the firewall between chaos in the economy and financial system,” he explained. “The financial system is functioning well because of those facilities.”