• Thoughts on the Market

The Mechanics of Fiscal Stimulus

With Michael Zezas U.S. Public Policy Research for Investors

Congress is weighing another round of fiscal stimulus, possibly by July. But the dynamics of passage in an election year could mean a narrow window to take action.

In this Thoughts on the Market series, Michael Zezas offers perspective on how U.S. public policy affects equity and fixed income markets, including trade tensions, infrastructure and government policy. Listen to this week’s update.

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Current Episode Transcript

Welcome to Thoughts on the Market. I'm Michael Zezas, Head of Public Policy Research and Municipal Strategy for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the intersection between U.S. public policy and financial markets. It's Wednesday, May 20th at 11:00 a.m. in New York.

As the summer approaches, more states are lifting stay-at-home restrictions and more Americans are reengaging in the economy. But it's hard to know if that will prove to be a sustainable boon. If all that activity allows COVID-19 to spread faster than the capacity for the U.S. to deal with it, then we could see Americans and the economy draw back.

In a nutshell, we think Congress is concerned enough about that risk that they're likely to appropriate yet another tranche of fiscal stimulus. We think they're likely to do it by July and we expect the size to be around $1 trillion, driven by further extensions of small business, unemployment, and state and local aid.

Why? It's simple in our view. Neither side clearly wins politically from a weak economy when their sharing power. And while you can expect to see headlines around Republican discomfort around the deficit impact of it all, and maybe even some drama that will make it seem like a deal is impossible, expect both sides to come together at the end of the day because their shared political incentives outweigh those concerns. But watch the calendar. We say this happens by July because, if it doesn't, it may not happen at all. Small business loan terms expire at the end of June and that's a natural catalyst for action. But if action doesn't happen, the deeper we get into summer, the deeper we get into election season politics and the harder it gets to legislate on something this big and potentially controversial.

And because of that dynamic, we have one final important point to make: we think this stimulus is likely to be the last one of the year because of election politics. Stay tuned, as in short order we'll be laying out our new framework for how to think about this and other critical market issues impacted by various election outcomes.

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