Fed Worried Major Fiscal Time Bomb About to Detonate!

by James DiGeorgia | 07/02/2020 6:20 PM
Fed Worried Major Fiscal Time Bomb About to Detonate!

The stock market is soaring, so too is the pandemic in 16 states, and the continuing escalation of the pandemic is precisely what Federal Reserve officials cited as their biggest fear according it’s June meeting minutes released on Wednesday.



President Trump is celebrating the staggering rebound in the U.S. stock indexes, and impressive new jobs report for June with 4.8 million of the over 42 million put out of work in March and April.


While Trump celebrates, the worst fears of the Federal Reserve cited in its June meeting minutes are being fulfilled; a new massive spike of the coronavirus is hitting 16 states, and threatening to become completely unmanageable national nightmare again.


Live 42% longer and still eat loads of cheese, breads, and rich desserts?The possibility that another complete shutdown from one end of the country to the other is growing, despite several Republican governors insisting they will not implement statewide shutdowns.


In the Fed’s June meeting notes, the country’s central bank is concerned that the enhanced unemployment benefits passed by Congress scheduled to expire at the end of July is a fiscal time bomb about to detonate. Despite the increasing likelihood of the pandemic becoming impossible to manage Republican Washington lawmakers are insisting the enhanced unemployment benefits will not be renewed no way, no how, even if unemployment remains in double digits.


Many of those in the Republican Congressional caucuses have expressed concerns that the enhanced benefit, a flat $600 federal top-up, might be a disincentive for getting back to work because some workers receive more in benefits than they earned in wages. So, when the benefits at the end of July expire, millions of unemployed people will suddenly have the financial rug pulled out from under them in what could be the apex of the first wave of the pandemic.

In June, the share of job losses that were temporary fell to 78.6 percent, a sign that a growing number of workers will not have a job waiting for them when the crisis lifts.

Alt: (Chart 538-Number of Layoffs Seasonally Adj )    FiveThirty-Eight.com

Then there’s the financial cliff state and localities are facing huge short falls because tax revenues have dried up and their expenses have gone up.


Lucy Dadayan of the Tax Policy Center estimates that the pandemic will reduce state revenue alone by $200 billion over fiscal 2020 and 2021.


Republican and Democratic Governors, mayors, and other local officials pleaded for continued for federal help. Most states and municipalities can’t deficit spend they have to balance their budgets, unlike the Federal government. This means that they will have to make huge cuts to their workforces: police, fire, EMT’s and other service driven workers essential to maintain a viable working municipality. Potentially millions of people could be laid off by state and local governments. It’s already begun, states and localities have laid off about 1.5 million employees since the pandemic began.


There is some bipartisan support in Congress to provide state aid, but it’s running into a roadblock in the Senate, from the White House.


The Democratic-controlled House has already passed another stimulus bill that includes funding for states, but Republican Senate leaders are ignoring the bill. The Senate has no plan and is saying they won’t have their own bill until the end of July.


Perversely, the 4.8 million in job gains reported in Thursday’s jobs report and a soaring stock market is eliminating pressure on GOP Senators to pass this desperately needed state and local funding.


Unless federal aid comes through soon, expect huge new public-sector layoffs and service cuts in the months ahead, followed by knock-on job losses in the private sector. The Chairman and the other members of the Federal Reserve have reason to worry this fiscal time bomb will go off and crush the U.S. and, for that matter, the global economy.


    Fed Chair: Economic recovery will depend on curbing the virus

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