How Would a Second Stimulus Check Impact Markets?

The $1,200 stimulus check sent out to individuals had mixed impacts on our economy, based on academic research, including by the University of California-Davis. For recipients with $3,000 or more in their bank accounts, there was no positive impact on the economy. However, for recipients with bank account balances up to $500, they spent 44.5 percent of their check, on average, within 10 days of receiving the stimulus check.

The first stimulus check was part of the CARES Act, which guided how the checks were issued:

The IRS began with those who filed 2018 and/or 2019 taxes, and looked at their adjusted gross income (AGI) as a starting point.

  • For “eligible individuals,” they received a full $1,200 check if they earned up to $75,000. If they earned between $75,000 and $99,000, the payment would be reduced by $1 for every $20 earned beyond $75,000. If they earned $99,000 or more, they would not be eligible for a stimulus check.
  • For “head of household filers,” they would get a $1,200 check for earnings up to $112,500. For earnings up to $136,500, the payment would be reduced by $1 for every additional $20 earned. If they earned $136,500 or more, they would not be eligible for a stimulus check.
  • For “married couples filing joint returns,” they would get a $1,200 check for earnings up to $150,000. For earnings up to $198,000, the payment would be reduced by $1 for every additional $20 earned. If they earned $198,000 or more, they would not be eligible for a stimulus check.

Depending on the filer, if they had a qualifying child 16 years or younger who they claimed on their tax return, each child could qualify for $500 in additional stimulus funds.

While the language is still subject to change because there’s no legislation passed and signed into law, uncertainty still exists regarding proposals for a second stimulus check/plan.

One proposal includes increasing the payments for dependents to $1,000 from $500. Another proposal includes casting a wider net for dependents – college students and/or older parents who reside in the same household, giving $500 for this category.

A September report by the National Bureau of Economic Research (NBER) shows how consumers across the income distribution levels handled their stimulus checks.  

The NBER study found that once a stimulus payment was received, the typical individual spent $250 per day, compared to $90 a day before stimulus checks were available to recipients. Within 10 days, more than 20 percent of each dollar was spent. However, the report found different activity depending on the respondent’s income level and job security.

The study found that for recipients with checking accounts with more than a $4,000 balance, only 11 cents of stimulus money was spent in the month following receipt of their check. Looking a month out from when a stimulus check was received, those who had more assets were far less likely to spend their check quickly. However, for respondents with bank account balances of less than $100, more than 40 percent of their stimulus check was spent within one month.

These consumer expenditures offer a good indicator of how spending from another stimulus check would impact the economy. As the U.S. Department of Labor and U.S. Bureau of Labor Statistics show for 2019, there are different spending trends for each quintile or income strata (20 percent per quintile) for different income levels.

During 2019, each quintile increased, with the bottom quintile’s income growing by 6.6 percent, compared to the top quintile’s income growing by 6.7 percent. Quintiles two through four saw increases of income between 3.2 percent and 4.9 percent.

For reference, the 2019 “lower income bounds” are as follows:

  • Second quintile: $22,488
  • Third quintile: $43,432
  • Fourth quintile: $72,234
  • Fifth quintile: $120,729

“Average annual expenditures” for 2019 were $63,036 for “all consumer units,” or 3 percent more than 2018. A consumer unit is defined as either a family, an individual living on his or her own, and/or sharing costs with others or maintaining a residence with other individuals, but retaining the financial means to take care of themselves.

During 2019, while every quintile increased spending, the bottom quintile spent 8.6 percent more, versus the second quintile increasing their spending by 1.3 percent. All quintiles saw growth in spending for food at home, housing, transportation and cash contributions. Except for the second quintile, healthcare expenditures increased. For the food away from home category, the first, third and fifth quintiles increased spending. For apparel and services, the first, third and fourth quintiles saw increased spending.

Based on analysis conducted after stimulus checks were issued to individuals and families, sending out an additional stimulus check to those in the lower to mid-quintiles, along with promoting job growth and a strengthening job market, looks like the best way to help the economy recover. 

Examining Fed’s New Targeted Inflation Policy

Looking back to 2012, the Federal Open Market Committee (FOMC) – a collaboration of the 12 regional Fed banks and the Federal Reserve Governors in Washington – came together and published a Statement on Longer-Run Goals and Monetary Policy Strategy.

This officially rang in the FOMC’s public commitment to maintain inflation at 2 percent. It is based on a yearly change in the Personal Consumption Expenditures (PCE) price index, and is in accordance with The Federal Reserve’s “mandate for maximum employment and price stability.”

Guided by three events in the economy, according to the Brookings Institution, the FOMC was prompted to take a second look at 2012’s existing framework. The first factor, an approximation of the “neutral level” of interest rates, or interest rate levels correlated “with full employment” and inflation targets, kept dropping globally. The “lower neutral rate” is achieved when short-term interest rates, which are controlled by The Fed, stay at levels closer to zero versus higher levels. When this occurs, The Fed has little room to further lower interest rates, and therefore stimulate the economy. The next factor involves inflation rates and anticipation for future inflation rates to stay below The Fed’s 2 percent target. The last factor was unemployment falling to a five-decade low.

The FOMC’s Aug. 27 update reveals that the inflation rate has been lower than the 2 percent inflation target in recent years, despite housing, food, and energy increasing in price for consumers.

When there’s too little inflation, as The Fed explains, it can negatively impact the economy. If inflation remains below The Fed’s “longer-run inflation goal,” it can propel a self-fulfilling prophecy of further declining inflation levels.

As originally explained in 2012 and updated in August, the FOMC’s purpose is to “promote maximum employment,” keep prices stable, and “moderate long-term interest rates.” It also guides individuals and business owners with more information to make decisions, promotes greater “economic and financial certainty” and increases “transparency and accountability.”

The Fed, based on their FAQ section, has said that when inflation runs below 2 percent for an extended period of time, monetary policy will adjust to run above 2 percent for a period of time. Therefore, the FOMC is hoping to ensure that “longer-run inflation” will average at 2 percent.

The FOMC’s monetary policy is a big determinate in keeping the economy stable when the economy and financial systems are put out of balance due to factors such as inflation, long-term interest rates, and employment. The FOMC accomplishes its monetary policy via the “target range for the federal funds rate.”

Looking at the “level of the federal funds rate consistent with maximum employment and price stability over the longer run,” this rate has dropped compared to past average rates. With this in mind, the federal funds rate is generally expected to remain on the lower end of the rate spectrum more so now, versus years back. With interest rates closer to the bottom end, the FOMC believes that inflation and employment perils are more likely to stay depressed.

Based on comments from The Fed in August, the FOMC clarifies its Congressional Mandate regarding price stability and maximum employment, along with determinations on its short-term interest rate and other monetary policy considerations.

Following up on its Congressional mandate for The Fed to ensure maximum employment and price stability, the first thing to focus on is price stability or inflation.

Before, The Fed had a price stability target of 2 percent inflation, based upon the Personal Consumption Expenditures price index. The FOMC called this price stability “symmetric,” meaning that inflation above or below the target is equally concerning.

However, its new stance will now focus on attaining “inflation moderately above 2 percent for some time” after an ongoing time period of tame inflation. Based on comments from Fed Chair Jerome Powell, this is a flexible form of average inflation targeting.

This end goal of average inflation targeting suggests that when inflation is below the 2 percent target over an extended period of time, the FOMC will adjust its policy to encourage inflation above the 2 percent target to attain balance. However, The Fed didn’t give details regarding the time frame for its new averaged 2 percent inflation target, nor did it specify what actions it will implement to achieve it.

The Fed also made noteworthy changes to its “maximum employment” mandate. When it comes to this measurement, it originally compared the projections of “the long-run rate of unemployment” to the unemployment rate. According to the Brookings Institution, this also can be referred to as “the natural rate of unemployment or the non-accelerating inflation rate of unemployment (NAIRU).”

Since live estimates of the NAIRU can be unreliable, it’s no longer being considered. While the Summary of Economic Projections will still include estimates of unemployment statistics by FOMC members, it will unofficially take the place of the NAIRU readings. However, these FOMC members’ long-run estimates of unemployment will have less impact on monetary policy decisions.

How Do Interest Rates Looking Going Forward?

With these two changes to The Fed’s Congressional mandates, many expect monetary policy to be quite loose over the coming years, according to the Brookings Institution. By permitting hotter than normal inflation and low rates of unemployment, there’s a remote chance The Fed will increase interest rates prior to inflation running north of 2 percent for a measurable time period.