MNI EXCLUSIVE: US Fiscal Relief Will Lose Potency If Delayed

A fiscal package delivering relief to Americans would be stronger before year-end, former officials and business groups say, because dollars spent months from now would lose potency in preventing more labor market scarring.

The fiscal package may "have a less than 50% probability before year-end," said Nathan Sheets, a former top Fed and Treasury official. "A relief package coming later will not provide support in a period of economic softness and avoid labor market scarring."

"Fiscal coming later will put more money in people's pockets as the economy is recovering and could make the pace of recovery even more powerful, but what it doesn't do is protect the economy and protect vulnerable firms," Sheets added.

Talks in Congress have made little progress this month, even as Democrats and Republicans say action before they leave Washington for the holidays is vital. With a government shutdown looming, negotiators last week could only agree to a one-week extension of money, raising the stakes for a new Friday deadline to approve funding for both issues.

"The longer the delay, the greater the risk of a slowdown will continue," said Robert Eisenbeis, a former Atlanta Fed research director. "This is a very critical time right now."

DECEMBER BENEFITS CLIFF

Without a deal, a range of federal unemployment insurance programs will lapse at the end of December, a blow to the more than 10 million individuals receiving them. And the drop off in fiscal support would come just as the hit from the second wave of the virus intensifies.

Fed officials stress fiscal action is critical, and that support is penciled into their forecasts. Chair Jay Powell is expected at Wednesday's meeting to reiterate the need for a "bridge" including unemployment insurance and funds for small businesses and local governments.

Washington continues to wrangle over rival proposals each worth just over USD900 billion, or just over a third of the first package, even as Covid-19 cases and deaths reach new records. Demands from a small bipartisan group of lawmakers for another round of direct checks to Americans could also stall talks this week.

"The best bridge is money that lands in people's pockets and there is a lot of weight on unemployment benefits. That is the most important part," Sheets said, who is now at PGIM Fixed Income.

MAKE OR BREAK MOMENT

If talks fail going into the Christmas break, it may take until well after Joe Biden is sworn in as president before relief money is agreed upon, perhaps into March. Runoff elections for two Georgia Senate seats next month may also give Republicans more leverage in reducing the size of the package, devoting less money to jobless benefits.

"To not double down with additional relief at this point would lead to much longer scarring," said Sarah Crozier, a spokeswoman for Main Street Alliance, a grassroots small business advocacy.

"If you have to wait until February, you are going to see massive small business closures. Our small businesses are hanging on by a thread," said Crozier.

The New York Fed reported Monday that while consumer spending plans over the next year rebounded to 3.7% in November, expected incomes remained flat, suggesting a lag in purchasing power.

"We are in the midst of make-or-break months for millions of small businesses," said Karen Kerrigan, president of the Small Business and Entrepreneurship Council, who often testifies at Congress and meets with cabinet members and presidential advisers. "Local economies and countless jobs depend on the small businesses that have survived up until this point."