When the Chairman of the Federal Reserve speaks, people listen. Jerome Powell has the power to move the earth and sky when it comes to monetary policy and how to help deal with the current COVID-19 recession that is still gripping America and the rest of the world. It was not expected to see any change regarding the zero percent interest rates and no real expected updates on the Fed’s ongoing asset purchases during the current COVID-19 recession. Still, Jerome Powell did deliver more clear communications than he has in so many prior communications.
24/7 Wall St. has taken five key aspects that investors and economists will want to keep in mind for thew coming months. A strong market recovery has been followed by strengthening economic reports, although these just are not as strong as they used to be.
The first takeaway that needs to be considered, which is also probably the most important, is that interest rates are likely to remain low for quite some time. Powell noted a “whatever it takes” approach to support the economy, but the data released by the FOMC also indicates that Federal Reserve officials are currently projecting no plans at all to raise interest rates prior to 2022.
A second takeaway, following up on the “whatever it takes,” is that stimulus and support are likely to remain firmly in place. Fed officials have effectively committed to providing more support to the economy in the wake of the forced shutdowns. And to prove the point, the policy stance included a note that the Federal Reserve would maintain its recent purchases rate of Treasury and mortgage-backed securities rather than continuing with gradual weekly reduction.
That would imply $20 billion in Treasuries and $22.5 billion in mortgage-backed securities this week,. That will lead to an increase of the Federal Reserve’s balance sheet over the coming months as the Fed aims to keep a smooth functioning market. All in all, the Fed has purchased more than $2 trillion in Treasury and mortgage-backed securities since mid-March.
A third takeaway is the Fed’s view on the labor market. Jerome Powell noted that there is still much work to be done in the labor market despite last week’s much better than expected unemployment and payrolls report. He also noted that the labor market may have already hit a bottom, but he also said he does not know if that has formally come to pass or not. A key issue here is that Mr. Powell noted that there are well into the millions of people who may simply never be able to return to their old jobs. He also highlighted how inequality will require an all-in approach from society and from the government.
A fourth takeaway from the FOMC announcement and the press conference is that Powell believes the “Great Depression” is a bad analogy for the economy. Even though this second quarter’s expected drop in GDP is likely to be the worst on record, he says there are so many fundamental differences that make comparisons to the Depression wrong. As such, the response in 2020 was referred to as “fast and forceful” with a strong economy and a healthy financial system ahead of this recession.
The fifth takeaway that investors and economists should weigh is that Jerome Powell has not really pressed for any long-term fundamental changes in the potential of the economy. In short, that’s suggesting that the damage may not be permanent even though the cause and effect that has been seen so far is so different than anyone living has dealt with. He does of course see that there are real risks that the damage to long-term forecasts, but he has not made that change himself. And as such, Powell noted that the Fed does not have any target level for asset prices in mind.
As for all of the words added up, the Dow was still down 0.7% (170 points) and the S&P 500 was still down 0.2% (6.5 points). The yield on the 10-year Treasury was last seen down 8 basis points at 0.75% on Wednesday afternoon after having challenged 0.9% last week.
There are many ways to interpret the formal statements and the commentary from Federal Reserve officials, and these observations were how the market should be viewing them as of Wednesday, June 10, 2020.
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