Trump rolls the dice on recovery as stimulus talks break down

Fed and economists warn stimulus deadlock will hamper recovery as risk of turbulent transition rises

Trump called off stimulus talks 

Lehman Brothers had fallen and the worst US recession since the Great Depression was only just beginning. 

Barack Obama was taking over a sinking ship when he won the presidency in the depths of the financial crisis in late 2008.

With his inauguration more than two months after the election, Obama’s economic advisers were parachuted in to help George W. Bush's team on their economic rescue plans and to calm financial markets. The transition risked making the crisis worse but instead the smooth handover helped as the economy entered a downward spiral.

America is once again facing an economic crisis on the eve of an election, but similar cooperation between Democrats and Republicans is in short supply.

In a flurry of tweets on Tuesday night, Donald Trump, now back in the Oval Office, pulled the plug on talks with Democrats for a new stimulus deal. By withholding much-needed stimulus from the economy just 27 days before the vote, the president is rolling the dice on both his dimming election chances and the economy. Can a rescue deal still be struck?

Trump insists stimulus is now off the table until after the election, meaning households and businesses could be waiting months for relief. 

“I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill,” he tweeted as Wall Street retreated on the gridlock

The US economy could be hostage to a turbulent transition period if Trump loses and the deadlock continues beyond the election. Much would depend on how Trump reacts to defeat, but cooperation on the levels seen between Bush and Obama seems unimaginable.

The stimulus talks stalled on the size of the package. The gap between Trump’s “very generous offer” of a $1.6 trillion package and the Democrats' $2.4 trillion proposal was too large for the president to stomach. 

The Democrats’ version contained a new stimulus cheque, an extension of higher benefits for unemployed workers, business relief and aid for state and local governments - a key sticking point in the talks.

Any deal needs the approval of the Democrat-controlled House of Representatives and the Republican-held Senate, with the new Congress not sitting until January.

But Trump sided with the Republicans in the Senate who are resisting any deal costing more than $2 trillion. In the latest barb in her ongoing spat with the president, House Speaker Nancy Pelosi said he was “putting himself first at the expense of the country”.

With polls putting Joe Biden’s national lead close to double digits, Trump’s tactics are risky, analysts say.

James McCann, senior global economist at Aberdeen Standard Investments, says Trump has “raised the stakes for the election” by deepening the impasse.

“The irony of Trump calling off talks with the Democrats is that a blockbuster stimulus package is the one thing that could have shifted the narrative.”

Inaction could hurt Trump’s election hopes, but also prove just as costly for the US economy.

Just hours before Trump ended talks, Federal Reserve chair Jerome Powell delivered a stark warning on failing to reach a deal, saying businesses and the economy’s recovery were on the line. 

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” he said.

“Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth.”

He added that policymakers needed to keep their foot on the gas until the economy “is clearly out of the woods”, arguing the “risks of overdoing it seem, for now, to be smaller”.

Ian Shepherdson, US economist at Pantheon Macro, agrees, warning the “risk of the economy stagnating or shrinking again is rising” unless a deal is reached soon. He explains “the barriers to immediate fiscal action are political, not economic” with financial markets still willing to lend to governments and central banks also supporting debt issuance.

Some stimulus may still be signed off to help the US economy through a long winter. Rather than backing a full package, politicians could take a piecemeal approach to providing help for the world’s biggest economy. 

Shortly after calling off the talks, the president signalled he would be willing to sign off on a standalone bill approving a $1,200 stimulus cheque for Americans. There is also some money left over from previous economic aid packages. 

Patrick Perret-Green, head of research at AdMacro, says there is "near-unanimous support for direct payments to individuals” and expects the president to up the pressure on Democrats.

He says the president needs “a ‘Hail Mary’ moment” as Biden’s lead in the polls starts to widen. Trump is rolling the dice not just on his presidency, but the US economy's recovery.