In a widely-expected non-move, the Federal Reserve held steady on the fed funds rate as COVID-19 keeps a lid on commercial activity in the U.S. In its statement, the central bank pledged to keep rates at essentially zero until "full employment returns."
Fed leaves rates unchanged, as expected, promising to keep them at zero
Rates won’t rise again until full employment, inflation return, Fed says
Market rallies despite gloomy Fed picture as investors focus on drug trial
(Wednesday Post-Fed) Today’s Fed meeting takes a definite back seat to a lot of other news. The meeting concluded without a policy change but with the Fed pledging to keep rates at zero until the economy is back on track toward full employment and inflation. The way things are going, that could be a long time.
The non-move on rates—widely expected considering the Fed just dialed them down to zero and has made clear it plans to keep things there as long as necessary to help the devastated economy—comes on a day when stocks are red hot. It’s probably fair to say investors have their eyes more on the positive coronavirus drug trial news today than on a stay-the-course Fed.
Dr. Anthony Fauci said in a White House briefing today that a remdesivir coronavirus trial done by the National Institute of Allergy and Infectious Diseases showed the mortality rate trended "towards being better" with patients who took the drug, CNN reported. Fauci added he was told that the data shows the drug has a "clear-cut, significant, positive effect in diminishing the time to recovery." This followed positive news on a trial by Gilead (GILD), the maker of the drug.
These sunny reports helped stocks post huge gains pretty much across all sectors before the Fed decision, with about 10 stocks rising for each one falling. That’s the opposite of what you might remember from a couple of months ago when 95% of stocks were falling every day.
In another sign of better market health, the small-caps and stocks that had been hammered most by the virus like retail and travel continued to outpace larger Information Technology and Health Care stocks that many had flown to initially when the pandemic hit in February.
All this might seem like a long way of coming around to the point that the Fed did nothing new on rates today. Obviously, the Fed remains extremely important here, and people continued to listen closely as Fed Chairman Jerome Powell took the podium after the Fed released its statement.
In its post-meeting statement, the Fed gave a gloomy analysis of the economic situation. That’s probably not too big a shock considering some of the data we’ve seen over the last few weeks, but it’s worth a look at how the Fed views things.
“The virus and the measures taken to protect public health are inducing sharp declines in economic activity and a surge in job losses,” the Fed said in its statement. “Weaker demand and significantly lower oil prices are holding down consumer price inflation. The disruptions to economic activity here and abroad have significantly affected financial conditions and have impaired the flow of credit to U.S. households and businesses.
“The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term,” the statement continued.
Few if anyone had expected the Fed to be anything less than ultra-dovish at this meeting. That said, pledging to keep rates at zero until full employment is on the way back (it’s unclear how the Fed will know that) does seem pretty amazing when you think about it. Economists debate what “full employment” means, but most agree the U.S. was pretty close to it when the unemployment rate dipped below 4% and stayed there over the last year or two ahead of the pandemic.
In coming months, analysts think unemployment could reach the mid-teens or even higher. Some say the economy can recover relatively quickly if a vaccine becomes available, but even optimistic estimates peg the unemployment rate in the high single digits as late as early 2021. You never want to rule out anything, but the chance of the rate dropping back below 4% in coming years seems really hopeful. The only thing to conclude is the Fed expects rates to be stuck at zero for a long, long time.
As for 2% inflation, the economy had a lot of trouble hitting that Fed target even in the best of times over the last few years. Saying rates will go up again when inflation is on track to get back to 2% is almost like saying don’t hold your breath.
It would take far more space than we have here to go over all the things the Fed has done to try to prop up the economy since this crisis began. To just name one, this week the Fed announced an expansion of the scope and duration of the Municipal Liquidity Facility (MLF). The MLF is part of an initiative to provide up to $2.3 trillion in loans to support U.S. households, businesses, and communities. The expansion is designed to “allow substantially more entities to borrow directly from the MLF,” the Fed said.
In his press conference, Powell called the Fed’s actions “broad” and said they’ve helped market conditions “improve substantially” in recent weeks. He added that “direct fiscal support” will also be needed. He praised the CARES act, which Congress passed to help ease the damage. He added that both the Fed and Congress might have to do more to prop up the economy down the road.
“Policies (from Congress) that protect businesses, workers, and households from avoidable insolvency” have a big price tag but can help the economy emerge from this crisis with less damage, Powell said. He added the Fed’s policy stance is where it should be “for now” and will keep it there until the economy has weathered the effects of the outbreak and is on track to achieve the Fed’s goals. “We will continue to use our tools as needs be,” he said. The Fed is “waiting to see more from the economy” and then will address whether more asset purchases are necessary.
Some economists wonder if there’s more the Fed could do, with a few forecasting the Fed might have trillions of dollars more in quantitative easing (buying government bonds and other assets) up its sleeves if necessary to keep rates low and grease the economic skids. Another possibility is the Fed adjusting rates other than the Fed funds rate, including the rate on excess reserves that banks store at the Fed.
There’s even some question about whether the central bank might want to step into U.S. equities. It’s happened with other central banks but never here. The Bank of Japan (BoJ), for example, has been an aggressive buyer of equity ETFs in recent years, and according to research by Nikkei, through its ETF buying program, the BoJ is listed among the top 10 shareholders in 49.7% of Tokyo-listed stocks. This isn’t to say the Fed is headed down that road, but compared to other central banks, pushing the fed funds rate to zero isn’t the only arrow in its quiver.
The other question is whether Powell still sees things coming back quickly when the virus fades and people open up stores and restaurants again. Earlier this month, he said an economic comeback “could be robust,” so investors likely listened carefully today for any changes in tone. The damage being done to the economy is so extensive that some economists wonder if a quick recovery is possible.
The Fed basically indicated today that it believes the zero rate situation here could last for years, That wouldn’t be unprecedented when you consider it took until late 2015 for the Fed to raise rates again after lowering them to effectively zero during the 2008 financial crisis. The gap between rate increases was nearly a decade.
Zero rates can help companies climb out of the deep hole they’re in, but they can raise debt worries. At this point, Powell and company don’t seem all that worried about the debt load, in part because so far the rate cuts don’t appear to have reduced demand for U.S. bonds.
Low rates also might cause inflation concerns in normal times, but these times are far from normal and Fed Chair Powell has made it clear he’s not worried about inflation. The worry now might be more along the lines of deflation as unemployment is expected to soar into the teens by mid-year, many analysts say. If you want to see how badly deflation can hurt an economy, check Japan’s growth rate over the last 30 years. The Fed is actively trying to prevent that scenario.
While stocks held onto their sharp gains after the Fed announcement, Treasury yields remained right near where they’ve been parked for weeks down near 0.6%. That’s not far from the all-time closing low posted in March. Increasingly, so-called “safe-haven” assets like bonds, gold, and the U.S. dollar appear to be reflecting economic caution even as the stock market works higher on hopes for a V-shaped recovery. It feels like relationships are off, but that might be a sign of investors trying to cover every base in a very unusual situation.
By late in Wednesday’s session, the S&P 500 Index (SPX) had recovered more than 60% of its losses from the all-time high in February to the three-year low posted in March.
CHART OF THE DAY: HANGING OUT AT RESISTANCE. The S&P 500 Index (SPX–candlestick) is facing resistance at the 61.8% Fibonacci retracement level (yellow horizontal lines from high at 3393.52 to low of 2191.86). Note that since Feb 19, when the selloff started, this resistance level was valid a couple of times. Data Source: S&P Dow Jones Indices. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Powell Position: Generally, Fed Chair Powell has received accolades from investors and analysts over the last month or two for his performance during the crisis. He’s increasingly seen as a steady hand at the tiller and a voice of authority, with a survey of financial analysts reported by CNBC this week giving him a high grade. That’s a change from two years ago when Powell first took the helm. He was admired then for his depth of experience, but often caused volatility on Wall Street when he spoke at these post-meeting press conferences, saying some things that might have been a little too direct. Whether you like him or not, he arguably deserves credit for upping his game when it comes to talking “Fed-speak” and not alarming investors as much as he used to. This could be especially handy now as the Fed is back in the game it was trying to get out of when Powell first took over: Giving the markets a little wind-blown assist.
Looking Back, Not Forward: Yesterday saw earnings come in fast and furious, and also featured many companies withdrawing guidance. This trend gained steam lately as companies deal with all the uncertainty. Of the 122 S&P 500 companies reporting through last Friday, only 50 (41%) discussed 2020 guidance, and 30 of those withdrew guidance, according to research firm FactSet. That left just 20 that provided guidance for the full year.
Looking more closely at the companies that did provide 2020 guidance, 10 of the 20 issued annual guidance that was lower than their previous outlook, while six maintained previous guidance and four actually raised guidance, FactSet said.The question is whether some start providing guidance again in Q2, but that would require having a lot more answers. In the meantime, lack of guidance makes investors’ jobs harder, because they don’t have all the information they normally would.
To Guide or Not to Guide? It also might rekindle the debate about whether companies should provide quarterly guidance in the first place, an argument that’s gone back and forth now for a while. Some people argue that by insisting on guidance every quarter, investors and analysts cause companies to think about short-term stock gains rather than long-term health and innovation. Others say companies can play with guidance to make it look overly conservative and game the market by coming in above that. The pro-guidance argument is that the more information investors have, the better. For better or for worse, we’re moving forward without as much information as usual, and that could mean additional volatility in the short run amid confusion over where stocks should be priced.
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