Kudlow Offers Small Steps on Virus, Market Pleads for Giant Leap
Kudlow Offers Small Steps on Virus, Market Pleads for Giant Leap
(Bloomberg) -- After days of playing down coronavirus risks, President Donald Trump’s administration shifted ground Friday and opened the door to some “micro-measures” to shelter what they see as a fundamentally strong U.S. economy from the spreading epidemic.
Investors, who spent the day stampeding toward the safest of assets, seemed to be expressing a different view: It’s time to go macro.
In a Bloomberg television interview early Friday, Trump’s top economic adviser Lawrence Kudlow said a package could include help for workers forced to stay home, and small businesses or industries such as airlines hard-hit by the virus.
“We are in the camp that wants timely and targeted micro-measures,” Kudlow said, continuing to sound relatively unfazed. “Let’s not assume the worst.”
In particular, he dismissed the need for the kind of across-the-board fiscal stimulus that some economists have urged: “We don’t want to willy-nilly throw $300-$400 billion, with a thousand-dollar check to every American.”
Financial markets appear to be clamoring for something very much along those lines.
May Have a Situation
While U.S. stocks recouped some losses late Friday, and even managed to close higher on the week, they’re still down more than 10% from last month’s peak. Yields on government bonds hit record lows and corporate credit markets had one of the most traumatic days in a decade.
Investors, in short, are worried that not enough is being done to prevent a recession.
”It’s quite possible the market’s telling you here that we may have an economic situation that requires hundreds of billions of dollars of stimulus,” said Michael Feroli, JPMorgan Chase & Co.’s chief U.S. economist. “We could be facing a problem of a shortfall of aggregate demand, in which case, just targeted stimulus may not be enough.”
All week, the world’s most powerful policy makers have disappointed investors with the paucity of their actions. A Group of Seven statement promised much but delivered little. An emergency Federal Reserve interest-rate cut wasn’t immediately joined by other central banks – and failed to halt the market slide.
Anecdotal reports of the virus’s impact in the U.S. are mounting, from airlines and other companies. The outbreak remains well short of the scale it’s reached in countries like China, South Korea and Italy. The possibility it could get there – and the fact that the administration has been playing down that risk – is troubling markets.
On Friday, just as Kudlow was hinting at the possibility of action as soon as next week, his boss Trump questioned whether fiscal stimulus was needed and again pounded the Fed for more action. “The Fed should cut and the Fed should stimulate,” he said.
Trump’s confrontational approach contrasts with the close relationship that the Fed had with the administrations of former presidents George W. Bush and Barack Obama during the financial crisis more than a decade ago. In past crises, the Fed has worked in sync with the U.S. Treasury in a closely coordinated response.
‘Very Rapidly’
Kudlow said the White House would be able to “move very rapidly” if conditions worsen. He said it could use executive orders, but would not hesitate to go to Congress for more assistance.
One option under consideration is deferring taxes for the already-hit cruise, travel and airline industries, according to a person familiar with the plan who spoke on condition of anonymity. The Washington Post reported that possibility initially.
Congress so far hasn’t shown much appetite for a big fiscal push to fight the virus, either. Senate Finance Committee Chairman Chuck Grassley and Ways and Means Chairman Richard Neal both said this week that it was too soon to talk about tax cuts.
Neal has said that he is looking to work out a deal with Treasury Secretary Steven Mnuchin on paying for an infrastructure package.
Other steps under consideration by Democrats in the House, where they hold a majority and so control the U.S. government’s purse-strings, include measures to prevent coronavirus victims from being hit with surprise medical bills and address a lack of paid sick leave at many companies.
Congress did pass – and Trump signed on Friday – an $8 billion emergency spending bill that includes funds to help state and local governments fight the virus and low-cost loans for small firms facing disruptions to their business.
‘On the Case’
Some economists said the administration’s targeted approach is the correct one, because the economic impact from the virus is likely to be short, though sharp.
“It makes sense to tide folks over during a crunch period to limit any lasting economic damage,” said Peter Hooper, global head of economic research for Deutsche Bank AG. “We don’t need big fiscal stimulus to take us through what we think is going to be a relatively brief crisis.”
Others though argued that the administration should also be working on steps that could kick in should a recession develop, such as a cut in payroll taxes.
“We should be preparing for a muscular federal fiscal response,” said Mark Zandi, chief economist at Moody’s Analytics Inc.
He said that’s particularly the case given the limited ammunition that the Fed has to fight an economic contraction because interest rates are so low.
“Investors and everyone else would be much more comforted if they felt the federal government was on the case, not that they were downplaying it,” Zandi said.
--With assistance from Craig Torres and Erik Wasson.
To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net;Max Reyes in Washington at mreyes125@bloomberg.net
To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Ben Holland
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