The exceptional measures taken by the US authorities to bolster the liquidity of companies and markets in response to the Covid-19 crisis have resulted in a significant expansion of bank balance sheets. Since the financial crisis of 2007-2008, regulators have tightened balance sheet constraints significantly. Fearing that leverage requirements could damage banks’ ability to finance the economy and support the smooth functioning of financial markets, these have temporarily been relaxed. However, the Federal Reserve is unlikely to undergo a slimming regime that will scale back bank balance sheets for a number of years (and almost certainly not before the end of the period of relaxation of requirements)
In response to the crisis triggered by the Covid-19 pandemic, in April the US Congress set up the Paycheck Protection Program (PPP), a small business lending programme guaranteed by the Federal government with an overall budget of nearly USD 650 billion. Under certain conditions, the loans can be converted into subsidies within the limit of payroll costs, interest on mortgages, rent and utilities paid during the 24 weeks after the loan was granted. The loans will be partially or completely forgiven on condition that employment and wages are maintained by the end of the year. At 22 June, 4.6 million SME had borrowed more than USD 515 billion under the programme, virtually all of which was borrowed as early as mid-May
There were no exceptions. As expected, the US economic barometer, which covers all or part of the data available through May 2020, is signalling the worst recession to have hit the United States since 1946 ...
Fed Chair Powell’s comment about what would happen in case of a prolonged recession has weighed heavily on equity markets. Historically, recessions are accompanied by major equity market drawdowns. The year-to-date decline is more limited, which stands in stark contrast with the plunge of activity. Massive monetary and fiscal policy support has led to a reassessment of the distribution of risks, which goes a long way in explaining the rebound of equity markets. The focus is now shifting to the outlook for corporate earnings, hence the importance of the debate on the shape of the recovery.
In the USA, as elsewhere, the paralysis of activity caused by the Covid-19 pandemic has affected the production of statistics, which have become harder to interpret. The rebound in hourly wages in April indicated by the “pulse” is a false signal and should be treated with caution: it can be explained by the collapse in hours worked, against which wages always show a certain inertia. Not only is the information gathered from companies incomplete, but there may well have been a lag between the shutdown of businesses and the stopping of wages [...]
Pressure on dollar liquidity created an urgent need for action from the US Federal Reserve (the Fed). Assuming its role as the global lender of last resort - the consequence of its position as the issuer of the international trade and reserve currency - the Fed reactivated the permanent or temporary swap agreements that it established with 14 other central banks in 2008. In order to extend the reach of its dollar supply, the Fed has also created a repo facility for the central banks of countries that do not have dollar swap agreements. The high fees charged, however, will limit take-up, depriving the markets of what could be a significant calming influence.
