‘Time to Use the Great Fiscal Power of the US’

Plus: GDP takes a plunge By Yuval Rosenberg and Michael Rainey Fed Chair Powell Says Economy Will Need More Stimulus Federal Reserve Chair Jerome Powell said Wednesday that both the central bank and Congress will likely need to do more to support the economy and promote a strong recovery from the coronavirus crisis. Powell emphasized that the Fed, which slashed its benchmark interest rate to near zero last month and left them there on Wednesday, is “committed to using our full range of tools to support the economy in this challenging time.” He pledged that the Fed would act “forcefully, proactively and aggressively” until the economy is on a path to recovery. “We can continue to be part of the answer,” Powell said. “Will there be a need to do more, though? I think the answer to that will be yes.” Powell added that Congress had also responded aggressively to the pandemic with the CARES Act and other relief legislation, but that “it may well be the case that the economy will need more support from all of us if the recovery is to be a robust one.” Powell noted that Congress could mitigate long-run damage to the economy by enacting policies that help protect companies and households from “avoidable insolvency” and allow businesses to keep their workers. ‘Time to Use the Great Fiscal Power of the United States’: The Fed chair has in the past warned about the risks of rising U.S. deficits, but after some Republicans have cited those concerns in recent days in calling for caution about additional coronavirus spending, Powell on Wednesday said that the federal debt burden shouldn’t be the focus now. “I’ve have for a long time been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective at the federal level,” Powell [said](. “This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible. The time will come again, and reasonably soon I think, where we can think about a long-term way to get the fiscal house in order, and we absolutely need to do that. But, in my personal view, this is not the time to let that concern, which is a very serious concern, to let that get in the way of us winning this battle.” The Fed has taken unprecedented steps to support the economy, buying up trillions of dollars in bonds as it seeks to ensure markets continue to function and bolster businesses, states and municipalities. The Fed also [said]( Wednesday that it would leave rates near zero until the economy is back to full employment and inflation rises to around its long-standing 2% target. “Both the depth and duration of the economic downturn are extraordinarily uncertain, and will depend in large part on how quickly the virus is brought under control,” Powell said. GDP Contracts at 4.8% Pace in First Quarter The U.S economy contracted at a 4.8% annualized rate during the first three months of the year, the Commerce Department estimated Wednesday. The decline — the worst since the 8.4% plunge in the fourth quarter of 2008 — reflects the extreme steps businesses and workers took in March to slow the spread of the coronavirus. Consumer spending saw its biggest drop since 1980, and business investment fell faster than it has in more than a decade. The economic data is expected to be dramatically worse in the second quarter as job losses and business closings continue, likely producing the worst recession the country has seen since the Great Depression. The Congressional Budget Office is projecting a 12% decline in GDP in the current quarter. “Despite massive government aid packages and near-zero interest rates, businesses big and small risk going bankrupt, while consumers may remain wary of hitting shops and restaurants amid health concerns, higher debt burdens and job insecurity,” Bloomberg’s Katia Dmitrieva [wrote](. Quote of the Day “I’m a fiscal hawk from way back, and all of my heebie-jeebies are going off when I see these numbers. But then I look at the scale of the problem, and I think, yeah, that’s that. Gotta do it.” – Douglas Holtz-Eakin, the president of the right-leaning American Action Forum think tank and former head of the Congressional Budget Office, as quoted by [Politico]( on the government’s deficit spending in response to the coronavirus pandemic. Politico’s Victoria Guida and Marianne LeVine notes that economists from a wide range of ideological backgrounds are encouraging Congress to keep spending, saying this is not the time to focus on the deficit. Small Business Loans Aren’t Working for Independent Restaurants Some independently owned restaurants are planning to return the loans they have received from the federal government due to concerns about the conditions the loan program imposes, the Financial Times [reported]( Wednesday. In order for loans provided by the $660 billion Paycheck Protection Program to be forgiven, small businesses are required to spend 75% of the money they receive on payroll within eight weeks. The remaining funds can be applied to overhead expenses including rent, but any money that is not used according to the guidelines must be repaid in two years, with 1% interest. Plenty of restaurants initially jumped on the PPP loans to help them get through a rough patch, but with many now closed and facing an uncertain future, the idea of taking on additional loans has lost its appeal. As a result, many are likely to return the loans they received, says the National Restaurant Association. “It was a great idea in the beginning — but it turned out to be another loan which I don’t need,” one Pennsylvania restaurant owner told the FT. “I have plenty of loans already. The attraction to this was the forgiveness.” Millions of jobs at stake: The restaurant industry employs an estimated 12 million people, and about 8 million of them are currently furloughed. Congress designed the PPP in an effort to keep small business employees on the payroll, but the window for doing so is closing for many independently owned restaurants, which may have to remain either partially or fully closed for weeks more, if not longer. As some restaurants rethink the PPP, some are hoping that Congress can step in with an aid package designed specifically for the industry. More of the money would need to be available for rent and other fixed expenses, the National Restaurant Association says, and the requirement to pay workers would have to be delayed until the restaurants fully reopen. A Plan to Allow Food Stamps at Restaurants With thousands of restaurants facing a possibly fatal slowdown in business and millions of newly jobless American in desperate need of food, Democratic lawmakers introduced a bill Tuesday that aims to address both problems at once. The legislation from Sen. Chris Murphy (D-CT) and Rep. Jimmy Panetta (D-CA) proposes to expand the Restaurant Meals Program, which allows some people who receive food assistance to purchase discounted meals at restaurants. The program is voluntary for states, with only California, Arizona and Rhode Island currently participating, and can be used only by elderly, disabled and homeless people who receive benefits from the Supplemental Nutrition Assistance Program, the nation’s primary source of food aid, often referred to as food stamps. The SNAP Covid-19 Anti-Hunger Restaurant Relief for You Act of 2020, or the SNAP Carry Act, would allow states to expand the meals program in the event of a public health emergency or natural disaster so that all SNAP beneficiaries can participate. That would theoretically allow all 38 million current SNAP beneficiaries to expand their sources of food while providing restaurants with much needed revenues. The National Restaurant Association supports the bill. Chart of the Day Wondering where the trillions of dollars in federal coronavirus aid is going? Reuters has an interactive guide that breaks down the numbers. [Click here for the dynamic chart](. Good news for those who miss their daily [Starbucks fix](. Send your tips and feedback to yrosenberg@thefiscaltimes.com. Follow us on Twitter: [@yuvalrosenberg]( [@mdrainey]( and [@TheFiscalTimes](. And please tell your friends they can [sign up here]( for their own copy of this newsletter. 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