In addition to concerns that helicopter money isn’t a substitute for jobs, some people are worried about the impact that the stimulus will have on inflation. This has rekindled the perceived divide between Wall Street and Main Street, which was never more evident than when the Dow Jones had its strongest week in nearly half a century despite unemployment claims skyrocketing more than seven times higher than their previous record (see Figure 3 below). Large scale purchases prop up asset prices but don’t do anything to affect productivity. It is projected to reach $9 Trillion soon. Figure 2 below shows the growth of the Fed’s balance sheet over the last 15 years. Since cash is a liability to the Federal Reserve, increasing the assets on the Fed balance sheet via Quantitative Easing is analogous with increasing the money supply. In contrast to normal open market operations, which primarily targets the interest rate by buying/selling short-dated treasuries, Quantitative Easing primarily targets the money supply by buying longer-dated treasuries or more exotic debt such as mortgage-backed securities (or now even broad-based ETF’s). They’re allowing depository institutions to lend out 100% of their deposits, borrow at a discount rate of 0.25%, and have aggressively started their fourth round of Quantitative Easing. The crux of the issue, of course, is that the sharp reduction in demand accompanying a two-month shutdown isn’t easily replaced in an economy whose hallmark is the consumer.

While the speed and scale of these responses are historically unrivaled, it remains to be seen whether or not they can salvage a real economy that’s facing its toughest test since the Financial Crisis. For their part, Congress passed the CARE Act, which provided an extra $2 trillion in stimulus and a $1,200 check to most Americans. They also tremendously expanded their lending capacity after Treasury Secretary Stephen Mnuchin announced that up to four trillion dollars would be available to businesses struggling to make ends meet amid the lockdown.

The Fed originally cut 50bps off their target rate in a March 3 rd emergency meeting, but slashed another 100bps-all the way to zero-just twelve days later.

Following the stunning first-quarter sell-off (see Figure 1 below), both the Federal Reserve and Congress took unprecedented actions to mitigate the economic impact of the Coronavirus.

Corona stimulus