Morgan Stanley
  • Thoughts on the Market
  • Aug 12, 2020

Rising Risks for New Stimulus?

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

Is it the end of the road for more economic aid from Congress this year? Michael Zezas, Head of U.S. Public Policy Research breaks down the impasse and outcomes.

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 US public policy and financial markets. It's Wednesday, August 12th at 11:00 a.m. in New York.

Is it the end of the road for more economic aid from Congress this year? That's the question investors are most frequently asking following the impasse in negotiations that emerged late last week. It's a valid question, as negotiators on Friday declared they were still far apart and the White House followed with a series of executive orders to continue key expired programs. But in our view, the answer is no, negotiations aren't over yet, and we still expect Congress to follow through with stimulus. But investors should follow this closely, as risks have risen to congressional action and failure to act could have meaningful market consequences.

Let's start with why we think the deal eventually gets done. The executive orders, on their face, extend supplemental unemployment benefits, an eviction moratorium, and cut payroll taxes. That should reduce the incentive for Republicans to stay at the negotiating table since they get most of what they wanted. But take a closer look and see that these orders may fall far short of achieving these lofty goals and hence push Congress back to the negotiating table. First, the supplemental unemployment benefits rely on creating a new program that deploys FEMA money, with states kicking in 25% of the cost. That means it likely takes time to set up the new program, delaying aid. And the aid could be smaller than expected, given states may be reluctant to take on new costs given their own budget stress.

On the eviction moratorium, the order directs the Secretary of Housing and Urban Development to seek eviction solutions, but little is specified on how it can be achieved. And on payroll taxes, questions remain about whether or not employers will actually stop withdrawing these taxes from employees paychecks. The order isn't so much a tax cut as a deferral of tax payments. And employers who put those payments back into employees paychecks now may have to take a big chunk out of paychecks at the end of the year, something they may not want to do. So taken together, it's entirely possible these orders don't achieve the short-term relief they intend and that, in turn, should pressure lawmakers back to the table.

But while we think a deal gets done, we also have to recognize that risks of no stimulus being enacted have risen. Republicans and Democrats appear far apart on issues like state and local aid, and the executive orders have likely created an incentive for both parties to watch and wait for how public opinion is shaped by them. Time equals risk in situations like these. It also means risk for the economy, where the delay in unemployment aid can hurt consumption, and the lack of state and local aid could lead to government layoffs and spending cuts. So while we think it all works out in the end, this is a key reason why our cross asset team sees some scope for a short-term pullback in the price of risk assets.

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