By Jenna Shields for Hub International 

Effective public and monetary policy will be key for guiding the recovery of the U.S. economy and financial markets from the impact of the COVID-19 pandemic.

Here at Hub International Florida, our retirement expert John Peterson can provide you with a bylined article outlining what you can expect.

As the U.S. enters a COVID-19-induced recession, there are more questions than answers on the depth and extent of the impact on the economy and the financial markets. Much will hinge on our policy responses – the $2 trillion coronavirus relief bill passed by Congress March 27, 2008 is a start.

The spreading pandemic has had four distinct economic impacts:

• Supply side disruption. China, where COVID-19 originated, accounts for 30% of global manufacturing output, and is an important link in the global supply chain and influence on the global economy. U.S. manufacturing, which lags China’s by one to three months, was resilient in February but fell off sharply as we moved to flatten the curve of the virus’ spread.
• Demand shock. Social distancing is particularly impacting the service sector in the large cities. As restaurants and bars account for about 10% of broader economic activities, this have a major effect on growth.
• Falling oil prices. This used to be good for the U.S. given the effect of lower prices at the pumps, but social distancing also limits our ability to spend the gas dividend.
• The financial market effect. Mounting volatility has caused leveraged investors to deleverage in response, which causes more volatility, and so the cycle goes. The overwhelming sale of securities is limiting the ability of brokers/dealers and other intermediaries to make markets, and it’s not merely throwing sand in the gears of the financial system. There’s spillover into the economy.

Where do we go from here?

Effective fiscal and monetary policy will help us bridge the gap between this time of disruption and when normalization is in sight. But timing will be dictated by the virus.

Unlike 2008, this is not a banking crisis. While the Federal Reserve can and will take steps to normalize market functioning and restore liquidity to help other markets, it is only equipped to do so much.

Expect the Fed to purchase Treasury notes outright, a move it will supplement with increased financing to banks and broker/dealers. Also look for it to bolster the commercial paper funding facility for highly rated business, an area now getting disrupted. In 2008, the Fed was allowed to buy other sorts of assets, like consumer and business loans under this facility to keep credit flowing. This type of program might well be rolled out in the near term. It’s such moves – providing liquidity over broader markets – that will help dampen the current market volatility.

Then there’s public policy. The $2 trillion coronavirus relief bill is designed to help affected citizens, small businesses and big businesses. It will be funded through additional debt. And that leads to the question: at what level will U.S. debt become a problem for the markets?

What are the implications of it all?

A variety of mitigating factors come into play, but think about these factors:

• Inflation. Could we see it as a function of the recession and steps to relieve the pressure? Structural factors, like demographic trends, slowing population growth and immigration patterns, might temper that. Plus, we’ve had such a prolonged period of low, stable inflation that it might be a good thing if we had a dab more of it in the next few years.
• Timing of the economic recovery. This is going to take more clarity on how COVID-19 actually progresses. Experts think if our cases peak in May, the economy may start to recover in the third quarter. If they peak later, or we see cases subside in the summer but a second wave recur requiring containment in the last half of the year, growth into 2021 will be affected. The big question will be successful trials of new vaccines, plus seeing how China fares as social distancing is lifted.