Bold policy action

We believe the required policy response includes drastic public health measures to stem the outbreak. A decisive, pre-emptive and coordinated policy response needed to stabilize financial markets is taking shape, particularly in the U.S. The key: policies to forestall any cash flow crunches among small businesses and households that could lead to financial stresses and tip the economy into a crisis.

Implication: Coupon income is crucial in an even more yield-starved world, including corporate credit and dividend income in selected equity sectors.

U.S. unemployment poised to surge
U.S. unemployment rate, jobless claims and recessions, 1980-2020

U.S. unemployment rate, jobless claims and recessions, 1980-2020

BlackRock Investment Institute and U.S. Bureau of Labor Statistics, with data from Refinitiv Datastream, April 2020. Notes: The chart shows U.S. initial jobless claims on a log scale and the U.S. unemployment rate. We project the claims number for this week based on state claim filings. The unemployment rate projection is stylized to illustrate how a sharp increase can unwind quickly in the recovery phase given the unique nature of the macro shock. The shaded areas indicate U.S. recessions according to the National Bureau of Economic Research. Forward looking estimates may not come to pass.

  • The U.S. labor market is experiencing some of its biggest turmoil in modern times with the shutdown of many parts of the service sector. We see the unemployment rate surging, tracking jobless claims. See chart above. Delinquency rates on consumer loans are close to their pre-crisis average. And rising unemployment may make a substantial number of households vulnerable to a fall in income.
  • Central bank policy has moved from mostly alleviating the dysfunction of market pricing and tightening of financial conditions to ensuring credit flows to businesses and local governments. Central banks – especially the Fed – have quickly used their full range of tools and invented new ones in a far shorter timeframe than the GFC. The Fed’s balance sheet has swelled 50% in just two months.
  • The Federal Reserve built on its “whatever it takes” approach to helping the economy through the coronavirus shock, announcing $2.3 trillion in new lending support to small business payrolls and local governments. U.S. policymakers are looking to add to the already passed $2 trillion fiscal support package to help small businesses. Euro area finance ministers look set to launch an array of measures providing broad support along similar lines – potentially including use of the European Stability Mechanism. Successful policy implementation is key now. Japan passed fresh stimulus taking its fiscal spending plans to about 10% of GDP.
  • Limited monetary policy space has put in focus the lack of tools left – and could backfire as a result. Some actions are raising questions about whether they may undermine the independence of central banks. The UK Treasury activated a funding facility for spending that will be directly financed by the Bank of England, rather than the gilt market, but called the move temporary.
  • We expect governments to significantly ramp up fiscal spending – far beyond what was already estimated in 2020 – on health systems and to provide support to small businesses and households.
  • It’s crucial to have proper guard rails around policy coordination, as we wrote in our Dealing with the next downturn paper.

Bottom line: We believe the longer stringent lockdown measures are in place, the more fiscal stimulus there is to come. Policy execution is key.

Meet the authors
Jean Boivin
Head of BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Elga Bartsch
Head of Macro Research
Vivek Paul
Senior Portfolio Strategist
Scott Thiel
Chief Fixed Income Strategist