JPMorgan Sees Negative GDP Growth In Addition To Negative Interest Rates (#GotBitcoin?)
An economic slowdown is inevitable in the face of the fast-spreading coronavirus, but the U.S. will eventually avoid a technical recession, JPMorgan economists said. JPMorgan Sees Negative GDP Growth In Addition To Negative Interest Rates (#GotBitcoin?)
As the outbreak situation continued to worsen, JPMorgan slashed its forecast for U.S. and global GDP further, now seeing negative growth in two consecutive quarters. The bank called for a “novel-global recession,” but didn’t expect an official downturn to be declared.
“COVID-19 is expected to roll through the global economy over February, March, and April, generating GDP contractions in most countries for at least one of the two quarters it straddles,” Bruce Kasman, JPMorgan’s chief economist, said in a note. “If our current forecast is realized it seems appropriate to characterize it as a novel-global recession.”
While a fall in GDP in two straight quarters typically defines a recession, in order for the National Bureau of Economic Research to label an official recession, the slowdown needs to last for “more than a few months.”
Additionally, there needs to be low readings in different economic indicators, including real GDP, real income, employment, industrial production and wholesale-retail sales.
“Our forecast for a mid-year growth rebound would not fit the NBER criteria that recessions should last for more than a few months,” Kasman said.
JPMorgan expects a fading of the coronavirus outbreak to promote a recovery in activity into midyear 2020, followed by an acceleration in growth in the second half of the year.
As of Friday, global cases of the coronavirus had reached at least 135,000 with nearly 5,000 deaths. Cancellations and restrictions for large events and businesses were imposed. The NCAA has canceled its March Madness basketball tournaments, a day after the National Basketball Association suspended the remainder of its season indefinitely.
“The breadth of ‘social distancing’ is increasing at a dramatic pace. Italy is now in total lockdown and the US as well as other countries are suspending flights from a wide range of nations,” Kasman said.
U.S. Economy Shrank At 4.8% Pace in First Quarter
Gross domestic product recorded steepest contraction since the last recession.
The U.S. economy in the first quarter shrank at its fastest pace since the last recession as the coronavirus pandemic shut down large parts of the country, signaling the end of the longest economic expansion on record.
Gross domestic product, the broadest measure of goods and services produced across the economy, contracted at a seasonally and inflation adjusted annual rate of 4.8% in the first three months, the Commerce Department said Wednesday. The decline marks the beginning of a near-certain recession, economists say, and is the biggest drop in quarterly economic output since the fourth quarter of 2008.
The Federal Reserve separately on Wednesday pledged to use “its full range of tools to support the U.S. economy in this challenging time,” according to a statement released after a rate-setting meeting where it left interest rates near zero and didn’t announce any new policy measures.
Federal Chairman Jerome Powell said the U.S. economy would need additional spending from Congress and the White House to ensure that a robust recovery could take hold following a broad and deep deterioration from the pandemic. Congress and President Trump already have provided more than $2.6 trillion in several economic assistance measures over the last two months.
Stocks rose on the hopes of progress for a coronavirus treatment and the Fed’s pledge to maintain support for an eventual recovery. Mr. Powell said the central bank “is going to be very patient, we’re not going to be in any hurry to move rates up.”
Efforts to contain the coronavirus have brought the economy to a near halt for around seven weeks now. That has sent some sectors, such as restaurants and tourism, into a tailspin.
Some states are beginning to open up their economies, but economic activity remains well below pre-virus levels.
Forecasters expect a much larger contraction in the second quarter, producing the two consecutive quarters of decline that commonly define a recession. Most economists expect a rebound in the second half of the year.
“The weakness was only in the last three weeks of March so there’s a lot more to come,” said James Sweeney, chief economist at Credit Suisse, adding that “we are headed for the largest contraction in GDP since the Great Depression.”
Data company IHS Markit expects GDP to decline at a 37% annual rate from April to June, which would represent the biggest drop since quarterly records began in 1947.
The GDP report reflected the early impact of widespread disruptions in the U.S. economy caused by business and school shutdowns, social distancing and other initiatives aimed at containing the virus. These responses to the pandemic started in the final weeks of the first quarter, and were an abrupt shift from steady economic activity before the virus arrived on U.S. shores.
Layoffs have skyrocketed since the pandemic started, with many analysts expecting the Labor Department to announce next week that the unemployment rate in April hit double-digits for the first time in over a decade. The number of American workers filing new claims for jobless benefits since mid-March has hit more than 26 million.
Larry Kudlow, the top White House economic adviser, in an event with the president and business executives on Wednesday said the economic contraction was “going to go on for a bit” but predicted there would be a “growing, recovering economy” by this summer.
Wednesday’s GDP numbers came amid negative news from major U.S. manufacturers and shaky demand for consumer staples from companies like PepsiCo Inc. and Coca-Cola Co.
Starbucks Corp. logged its first quarterly drop in global same-store sales in nearly 11 years in the previous quarter as a result of the coronavirus crisis. The coffee giant said Tuesday that it expects the impact of the pandemic to be even larger in its current quarter.
Personal consumption, the economy’s bulwark, fell at a 7.6% rate, the steepest drop since the second quarter of 1980. Spending on services—from haircuts to legal advice—accounts for nearly half of total GDP. It fell at a seasonally adjusted annual rate of 10.2%, the largest decline since the agency began compiling quarterly statistics in 1947, led by a decrease in health care services.
Goods spending fell by 1.3%, as lower spending on new cars was offset by stockpiling on items such as food and household essentials as people stocked up for the pandemic.
Business spending on software, research and development, equipment and structures fell at an 8.6% annual rate. Capital spending has been the economy’s weak spot for four straight quarters, after last year’s trade tensions and low oil prices prompted businesses to shy from investing.
Foreigners cut their purchases of U.S. exports, but imports fell even more.
The housing sector was a boon to the economy as residential investment rose at a 21% annual pace. The boost likely reflected lower short-term interest rates and mild weather propelling construction and improvements early in the quarter.
In a sign of consumer caution, the personal saving rate was 9.6% in the first quarter, up from 7.6% in the fourth quarter. The coronavirus pandemic prompted a record souring of consumers’ views on the U.S. economy in April sentiment surveys, but people remain hopeful the gloom will be short-term.
While most economists are expecting a massive drop-off in economic activity in the second quarter, they say the impact of the coronavirus shutdowns should be cushioned by the stimulus package passed last month to mitigate the economic devastation wrought by the novel coronavirus pandemic, which provides financial assistance to U.S. households and businesses.
Vacations To Go, a travel agency that specializes in cruises, was coming off its best year ever in 2019 until “the floor fell out” in February as coronavirus outbreaks on cruise ships dealt a punishing blow to the industry, Chief Executive Emerson Hankamer said.
“As news grew, our business began to wane,” he said. The Houston-based company had 950 employees before the coronavirus pandemic, a number that has dropped to about 200.
“We’re hoping it’s a furlough, but there’s not a lot of clarity,” he said, “There’s a little bit of new business, but most of it is taking care of cancellations or rebooking.”
Headed into 2020, Paul Feder, 34 years old, said he could tell his local economy was booming because the waterfront houses on Lake St. Clair in his hometown of Grosse Pointe, Mich., went big in decorating their homes with Christmas lights.
“You could just tell that more people were feeling it,” he said, referring to the strong economy in the Detroit suburb.
Mr. Feder was in the second round of interviews for his dream job as a business developer at an online retailer. Now the company he hoped to work for has implemented a hiring freeze, and Mr. Feder expects to lose his current job as a digital-marketing manager.
“It’s a roller coaster, every single day,” he said. “It’s just a lot of uncertainty and very difficult to map out what the future holds.”
U.S. Economy Likely To Shrink 5.6% This Year Amid Coronavirus, CBO Says
Congressional Budget Office sees sharpest labor-market deterioration since 1930s.
The Congressional Budget Office said the U.S. economy’s recovery from the downturn related to coronavirus responses will drag on through the end of next year, as investment collapses and the labor market experiences its sharpest deterioration since the 1930s.
Gross domestic product will likely be 5.6% smaller in the fourth quarter of 2020 than a year earlier, the CBO said Tuesday, despite an expected pickup in economic activity in the coming months. Though the CBO raised its projection for GDP growth in the fourth quarter of 2021 to 4.2% from 2.8% in an April forecast, the outlook continued to depict a long road to recovery.
That owes to the suddenness and severity of the current downturn, as well as expectations that social-distancing measures will remain in place, to some degree, for at least another year. The CBO estimated GDP will shrink 11.2% in the current quarter from the January-to-March period, more than quadruple the next-biggest quarterly decline in records going back to 1947.
Business and residential investment will be the main drags on growth this year, the CBO said, falling 15.8% and 13.8%, respectively, in the fourth quarter from a year earlier. Consumer spending is seen declining 4.1%, while government purchases will likely slip 1%.
A key source of support for the economy will be the four economic-aid packages passed by Congress since March, the CBO said. It estimated the packages will increase the federal budget deficit by $2.2 trillion in the fiscal year ending Sept. 30 and by $600 billion in the following year.
But that won’t be enough to bring a full recovery to the labor market, which “is projected to see the steepest deterioration since the 1930s” in the second quarter, the CBO said.
The agency sees the number of U.S. jobs falling to 133 million in the second quarter from 158.6 million at the end of 2019—more than triple the number of job losses in the 2007-09 recession.
While jobs should start to gradually return in the third quarter of this year, the CBO expects household employment to remain below pre-pandemic levels at 148 million in the last three months of 2021.
The CBO cited three factors that are likely to tamp down on job growth as social-distancing measures ease and consumer spending rebounds in coming quarters.
First the federal Paycheck Protection Program of forgivable loans to small businesses “will wane in coming months, which may precipitate a new wave of layoffs and furloughs,” the agency said.
At the same time, health concerns could dampen laid-off workers’ incentives to search for new jobs. Finally, declining tax revenue in state and local governments will likely lead to more layoffs in those sectors, the CBO said.
U.S. Economy Contracted 5% In The First Quarter As A Result of Trumponomics
GDP recorded largest quarterly rate of decline since last recession.
The U.S. economy’s first-quarter contraction was slightly steeper than initially estimated, and a key measure of corporate profits weakened as the coronavirus and related shutdowns began to have an effect.
Gross domestic product—the value of all goods and services produced across the economy—fell at a 5.0% annual rate in the first quarter, adjusted for seasonality and inflation, the Commerce Department said Thursday.
The revised number marked the largest quarterly rate of decline since the last recession. Most economists expect a bigger contraction in the second quarter, when lockdowns continued for weeks before states started slowly reopening their economies in May.
The agency previously estimated the first-quarter contraction at a 4.8% annual rate.
“First-quarter growth turned negative from just a two-week shutdown of the economy,” said Rubeela Farooqi, an economist at High Frequency Economics Ltd., in a note to clients. “The second quarter numbers will show a massive and unprecedented plunge in output, with weakness across sectors.”
A bigger estimate of the drop in private inventory investment was the main reason for the weaker GDP reading, which was partly offset by small upward revisions to consumer spending and business investment.
Private, nonfarm inventories subtracted 1.52 percentage points from the overall GDP. The Commerce Department’s initial estimate was for a 0.63 percentage-point drag from inventory investment.
U.S. corporate profits fell sharply in early 2020 as the economy contracted, according to the government’s first broad estimate of profits at U.S. companies in the first quarter. Stay-at-home orders and lockdowns that shut businesses to combat the spread of the new coronavirus started in mid-March near the end of the first quarter.
After-tax corporate profits without inventory valuation and capital consumption adjustments, a measure of profits from production that quarter, declined 15.9% in the first quarter from the prior quarter after rising 3.7% in the fourth quarter.
Compared with a year earlier, profits were significantly lower in the first quarter, down 11.1%.
Forecasting firm IHS Markit on Tuesday projected GDP would shrink at an annual rate of 39% in the second quarter, now in its ninth week. The Federal Reserve Bank of Atlanta’s GDPNow model most recently predicted a 41.9% annual rate of decline. The annualized rate overstates the severity of any drop in output because it assumes that one quarter’s pace continues for a year.
Consumer spending accounts for more than two-thirds of total economic output, and Thursday’s report showed Americans’ outlays contracted in the January-to-March period, but by a slightly lesser amount than initially estimated. Personal-consumption expenditures fell at a 6.8% annual rate in the first quarter, revised from a previous estimate of a 7.6% decline.
Business investment weakened in the first quarter, with fixed nonresidential investment falling at a 7.9% annual rate, an upward revision from an earlier estimate of an 8.6% contraction.
“The economy is in a slump right now,” said John Pfeifer, chief operating officer at trucks and equipment maker Oshkosh Corp., at a virtual conference in mid-May.
Revised data showed net exports added 1.32 percentage points to GDP as imports declined faster than exports. That compared with an earlier estimate of 1.30 percentage points.
Per-share earnings for S&P 500 companies fell 12.6% in the first quarter of 2020, compared with the first quarter of 2019, market-data firm Refinitiv said. Companies in the consumer discretionary and financial sectors were the hardest hit, followed by energy and industrial companies.
Not all sectors were hard hit. Technology, health-care and consumer staples companies posted per-share earnings gains of more than 5%, Refinitiv said.
Sales fell 1.4% for the index as a whole, led by financial and energy companies. Sales rose by 10.4% among health-care companies and by around 5% for real estate, consumer staples and communication services companies.
Analysts expect second-quarter results to be worse, with per-share earnings declining about 43% over mid-2019 and sales falling about 12%, Refinitiv said. Analysts projected continued profit and sales declines during the second half before year-over-year gains resume early next year.
Thursday’s report reinforced the view by many economists that the U.S. economy slid toward near-certain recession in the first quarter.
“Swift monetary and fiscal stimulus has been put in place to help the markets to help businesses and those individuals who are suffering, but the stress on the economy is real and will take time to recover,” Morgan Stanley Chief Executive James Gorman said last week during the bank’s annual shareholders’ meeting.
Bitcoin Bulls Might Get Negative Rates From Central Banks, Just Not The Fed
As Federal Reserve Chair Jerome Powell steers U.S. monetary policymakers away from negative interest rates, he risks becoming increasingly isolated among the world’s top central bankers.
Officials in the U.K., Europe and New Zealand are reportedly considering the once-unthinkable strategy of pushing interest rates below zero, seen as a form of economic stimulus. And bitcoin might be a beneficiary of looser monetary policy outside the U.S., even if the Fed never joins its foreign counterparts.
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The divergence over the issue shows just how challenged central bankers are as they struggle to find consistent strategies for healing economies devastated by the coronavirus and related lockdowns. The World Bank on Monday forecast global output will tumble by 5.2% this year, the worst recession since World War II.
With the situation so dire, more central bankers are willing to consider negative interest rates, which encourage people to spend money by making it more costly to deposit money in a bank account, as a viable monetary-policy tool. U.S. President Donald Trump joined the chorus last month, tweeting that “as long as other countries are receiving the benefits of Negative Rates, the USA should also accept the ‘GIFT.’”
It’s unlikely Powell will change his tune now with Federal Reserve policymakers scheduled on Wednesday to announce the outcome of this week’s two-day, closed-door meeting. So far, the Fed’s response to economic crisis has been to cut interest rates to zero, roll out emergency lending programs and inject trillions of dollars of new money into the financial system via asset purchases.
As recently as last month Powell said top Fed officials “do not see negative policy rates as likely to be an appropriate policy response here in the U.S.”
Bitcoin prices do appear to have risen in sync with this year’s announcements of new stimulus measures. According to the cryptocurrency research firm Delphi Digital, bitcoin began to “flirt” with the psychological $10,000 price threshold last week as the European Central Bank and Bank of Japan ramped up their asset-purchasing programs by a combined $1.5 trillion.
And now the drumbeats are starting for negative rates.
Last month, Bank of England Governor Andrew Bailey raised hackles when he told a parliamentary select committee that negative interest rates were under “active review” for the very first time in the bank’s 324-year history. The week before, he had explicitly ruled out the possibility.
The U.K. central bank already has cut its base interest rate to a record low of 0.1%.
Then there’s the European Central Bank, led by President Christine Lagarde, which opted last week to expand its stimulus measures by 600 billion euros.
But central bank analysts still forecast an 8.5% contraction in the euro area this year, and ECB board member Isabel Schnabel said Tuesday that cutting rates below zero “remains an option.”
“Our experience with negative interest rates has been positive,” the German economist said in a Twitter Q&A, according to Reuters.
The Reserve Bank of New Zealand said last month that negative rates could “become an option in future,” possibly as early 2021.
Central banks’ dalliances with negative interest rates in the mid-2010s didn’t seem to affect bitcoin’s price. But the digital asset has grown since then, with a market capitalization that’s roughly 20 times where it stood when the ECB went negative in 2014.
And while analysts in the past claimed that bitcoin was uncorrelated with most traditional assets, recent price action has shown an increasing connection between the cryptocurrency and broader economic and market developments.
Bitcoin is now increasingly regarded as a hedge against inflation, and negative rates represent an aggressive form of monetary-policy easing that could ultimately help to push up consumer prices.
Another school of thought says that if banks try to set deposit rates at negative levels, many customers would just pull their money out to avoid charges. Rather than keeping cash under the mattress, some might instead decide to store the value as bitcoin in a digital wallet.
More broadly, negative rates might simply highlight how experimental monetary policymaking has become in the coronavirus era, Stack Funds, a bitcoin index provider, wrote in a report last month.
“By being in bitcoin, you’re opting into transparency,” Lewis Harland, founder of analytics site Formal Verification, told CoinDesk.
U.S. Economy’s Historic Slump In The Second Quarter Lowered To A 31.7% Annual Decline, GDP Shows
GDP Has Partly Recovered In The Summer From A Steep Recession
The Numbers: The historic plunge in gross domestic product in the second quarter was revised down slightly to show a 31.7% annual decline, underscoring the devastation to the economy spawned by the coronavirus pandemic.
Economists polled by MarketWatch had forecast GDP to be rejiggered to slow a 32.5% drop. The government last month initially put the decline at a record 32.9%.
GDP is the official scorecard of the U.S. economy, measuring consumer spending, business investment, government outlays and other contributors to growth.
The U.S. is on track for a sizable rebound in the third quarter despite a summer surge in the coronavirus. Growth began to recover in May and it’s continued through August, though at a slower pace.
GDP is forecast to expand at a 20% annual clip in the third quarter, according to the latest MarketWatch forecast.
Even a gain of that size, however, would leave the economy in a shrunken state compared to pre- crisis levels.
What Happened: Consumer spending, the main engine of the economy, contracted by a slightly revised 34.1% annual clip in the spring. Hotels, restaurants and airlines were particularly hard hit.
The decline in business investment in structures and equipment also shattered previous records. Both fell by a more than 30% rate in the second quarter.
The level of inventories declined by a $205.5 billion annual rate in the second quarter, compared to the initial $234.6 billion estimate.
Federal spending soared by 17.4% as the government spent trillions to help households and businesses survive financially during a nationwide economic lockdown. Yet states and localities which face balanced budget constraints pared back spending after tax revenues sank.
International trade, meanwhile, has been devastated by the pandemic. U.S. exports fell a revised 64.1% in the second quarter while imports tumbled 53.4%. Both were little changed from the early estimate.
The rate of inflation fell at a 1.9% pace in the second quarter. Many companies had to cut prices after demand sank and sales dried up.
Previously GDP had never shrunk by more than 10% on an annualized basis in any quarter since the government began keeping track shortly after World War Two.
Big Picture: The economy is expanding again and third-quarter GDP is likely to show record growth, but GDP is still markedly lower than it was before the crisis. Reduced federal aid the still-spreading coronavirus could weigh on the economy in the months ahead.
The economy has also shown surprising resilience this summer, however, as evidenced by strong retail spending, surging home sales and construction, robust demand for new cars and trucks and rising industrial production.
Which way the economy goes will depend on whether more businesses can reopen, bring back jobs and restore some sense of normalcy. Another federal aid package could be pivotal, but Democrats and Republicans are divided over what to do next.
What they are saying? “While the economy has already made some headway toward recovery, the [GDP] figure is an important testament to the sharp economic pain inflicted by the coronavirus pandemic and should motivate policymakers to get their act together to preserve the nascent recovery, wrote senior economist Lydia Boussour of Oxford Economics in a note to clients.
Market Reaction: The Dow Jones Industrial Average DJIA, 0.79% and S&P 500 index SPX, 0.39% rose in early Thursday trades.
The Federal Reserve said it would adopt a new strategy on inflation targeting that gives the central bank more leeway to keep interest rates low. Low rates benefit stocks.
Fed Approves Shift On Inflation Goal, Ushering In Longer Era of Low Rates
Chairman Jerome Powell says central bank has changed how it views trade-off between lower unemployment and higher inflation.
The Federal Reserve approved a major shift in how it sets interest rates by dropping its longstanding practice of pre-emptively lifting them to head off higher inflation, a move likely to leave U.S. borrowing costs very low for a long time.
The move Thursday won’t lead to a significant change in how the Fed is currently conducting policy because it had already incorporated the changes it formally codified Thursday.
But the shift marked a milestone. Had the strategy been adopted five years ago, the Fed would have likely delayed rate increases that began in late 2015, following seven years of short-term rates pinned near zero.
By signaling Thursday it wanted inflation to rise modestly above its 2% target, the Fed revealed how the global central bank principle of inflation targeting, widely adopted over the last quarter century, may have outlived its usefulness.
Fed Chairman Jerome Powell initiated a policy-setting strategy review in late 2018, motivated by the sobering probability that central banks around the world will face greater difficulty than in the past to spur growth due to low levels of interest rates.
The coronavirus pandemic-induced recession brought those challenges into stark relief. The Fed cut its benchmark rate twice in March to near zero from a range between 1.5% and 1.75%, and it has bought trillions of dollars of government assets to stabilize markets
Mr. Powell said in a speech delivered online the Fed was applying lessons of the recent past in unveiling the most ambitious revamp of its policy-setting framework since it first approved a formal 2% inflation goal in 2012.
One of those lessons would be to place less emphasis on forecasts assuming a given level of low unemployment would produce higher inflation and instead wait for evidence that inflation was at the central bank’s 2% target. That means the Fed would let unemployment fall to historically low levels before raising rates, a step seen as controversial just a few years ago.
“It reflects our view that a robust job market can be sustained without causing an outbreak of inflation,” said Mr. Powell.
If investors believe the Fed’s words are credible, the changes announced Thursday “will increase the accommodative power of policy,” said former Fed Chairman Ben Bernanke. “When you go into a recession, markets will expect a longer period of easier policy and that will, in turn, increase the amount of effective stimulus.”
The changes also set the table for the Fed to provide more specifics about how long it expects to keep interest rates low as soon as its Sept. 15-16 meeting. It could do that by putting forward an inflation threshold and a qualitative description of labor market conditions that would warrant higher rates.
Separately Thursday, the Commerce Department revised its estimate of second-quarter economic growth, saying gross domestic product fell at a 31.7% annual rate, slightly less than its earlier estimate of 32.9%, due to the effects of the coronavirus pandemic.
The second-quarter contraction was the sharpest in more than 70 years of record-keeping. But the annualized figure assumes the economy shrinks at the same pace for a year, which analysts don’t expect. Other recent data indicate output is growing in the third quarter.
Unemployment claims fell slightly last week but remained historically high, signaling layoffs continue as the coronavirus hampers economic recovery.
New applications for unemployment benefits ticked down to 1 million in the week ended Aug. 22, the Labor Department said Thursday. Initial unemployment claims remain well below the recent peak of about 7 million in March but are far higher than pre-pandemic levels of about 200,000 claims a week.
The Fed had been moving in a new direction over the last 18 months, a point made clear in early 2019 when officials abruptly abandoned plans to continue lifting interest rates and later when the Fed cut interest rates last summer.
“The important changes have really already happened,” said William Dudley, who was president of the New York Fed from 2009 to 2018. “People already know the Fed wants to see inflation above 2%. This is a recognition of something that has been pretty implicit for a while.”
In 1977, Congress directed the central bank to maintain stable prices and to boost employment. Lawmakers weren’t precise about defining those goals, and after several years of discussion, Mr. Bernanke formally established a 2% target in 2012.
The nearly two-year strategy review was designed in part to put Congress on notice that the central bank was preparing to revise its interpretation of that delegated authority once again. The Fed also said it would conduct a similar, formal review every five years.
The Fed believes the economy runs best when businesses and consumers behave as if inflation will even out over time despite short-run ups and downs. Fed officials chose 2% as a compromise of sorts—a level low enough that consumers don’t factor it into their daily decisions but not so low that it leaves the Fed unable to counteract downturns when interest rates fall to zero.
While the Fed didn’t change its 2% target on Thursday, it made an important and widely anticipated shift by stating that if inflation runs below 2% following economic downturns, it will seek periods of inflation above 2% when the economy is stronger to prevent expectations of future prices from sliding lower.
The Fed didn’t specify exactly how high or how long it would allow inflation to rise above 2%.
Officials enshrined the conclusions of its strategy review on Thursday by formally approving a revamp of the central bank’s statement on longer-run goals and monetary policy strategy. Mr. Powell secured agreement from all 17 officials who participate in the Fed’s rate-setting deliberations.
For years, the Fed justified plans to withdraw stimulus as the economy recovered by warning that waiting too long to do so could provoke an acceleration of price pressures, particularly as joblessness fell below a level expected to push prices higher, sometimes referred to as the natural rate of unemployment.
The Fed said Thursday that decisions to raise interest rates would be guided by a desire to avoid shortfalls of unemployment from its maximum level rather than all deviations above or below the maximum level.
“They believe, and I agree, that there are substantial social benefits from a strong labor market,” said Mr. Bernanke. “Under this strategy, they will not take any steps to cool the labor market unless there is clear evidence of inflationary pressure.”
Some critics warned that the changes would do little to boost growth and instead would propel asset prices to higher levels, creating financial instability. Others had recommended even bolder steps, such as raising the inflation target, to avoid the low-inflation trap that has hampered central banks in Japan and Europe.
The Fed is committing to stay off the brake pedal for longer, but Mr. Powell said little Thursday about any additional tools the Fed might deploy to press harder on the gas.
“They’re not good at pushing on the gas. We’ve seen that for 20 years in Japan,” said Adam Posen, president of the Peterson Institute for International Economics. “They can’t force people to buy durable goods. They can’t force banks to lend. They can’t force companies to invest.”
When the Fed adopted its 2% inflation target in 2012, short-term rates were pinned near zero, as they are today. But central bankers, economists and investors largely expected them to return over time to more normal levels of 4% or so once the economic expansion matured.
Even before the pandemic hit, those rates were stuck at much lower levels than 4% for reasons that weren’t expected to change soon, such as demographics, globalization, technology and other forces that have held down inflation.
“The Fed is playing a hand of cards that is missing some of the face cards. It is dealt on a routine basis a less powerful hand of cards,” said David Wilcox, a former top Fed economist. “It behooves the Fed to play its hand as well as it possibly can.”
Meantime, the Fed had described its 2% target in recent years as symmetric, meaning 2% wasn’t a ceiling. Under the approach, the Fed wasn’t taking past misses of the target into account.
Except for a brief period in 2018, inflation ran below the target but never above it. While those misses were relatively small, Mr. Powell said they were concerning because failing to achieve the target could lead to harmful declines in businesses’ and consumers’ expectations of future inflation.
“The persistent undershoot of inflation from our 2% longer-run objective is a cause for concern,” Mr. Powell said Thursday. While it might be counterintuitive for the Fed to desire more inflation, particularly given rising costs for certain items like housing, Mr. Powell said the Fed needed to avoid “an adverse cycle of ever-lower inflation and inflation expectations.”
The dynamic is particularly troubling because expected inflation feeds directly into the general level of interest rates, he said. Lower inflation deprives central banks with already-low interest rates of tools to counteract downturns.
“We have seen this adverse dynamic play out in other major economies around the world and have learned that once it sets in, it can be very difficult to overcome,” said Mr. Powell. “We want to do what we can to prevent such a dynamic from happening here.”
Your Cash Earns Zip, Zilch, Nada. Don’t Make It Worse
It’s never been more tempting to take extra risk with the money you want to keep ultrasafe. But knowing what not to do is vital.
A good yield is hard to find.
With interest rates so close to zero across the board, many investors are undoubtedly wondering whether they can afford to keep a portion of their portfolio safe.
In fact, you can’t afford not to.
Since the Federal Reserve is depressing interest rates, it seems only fair that I should depress you. So please allow me to point out that $100,000 in a savings account will earn, if you’re lucky, $220 in interest income in 2020. That’s $1,509 less than you would need to outpace inflation this year, estimates J.P. Morgan Asset Management.
As recently as 2010, the yield on your savings account would have nearly kept up with the cost of living. For most of the years from 1985 through 2007, the return on cash resoundingly beat inflation.
Today, at banks, the national average interest rate on savings accounts is 0.16%, according to DepositAccounts.com; the average one-year certificate of deposit yields 0.46%.
U.S. investors have amassed $4.79 trillion in money-market funds, says Crane Data, a firm in Westboro, Mass., that tracks cash accounts. Yet the average money fund yields a piddling 0.03% in interest income. In the third quarter, reckons Crane, investors pulled $238 billion out of these funds. Yield is so hard to come by that several asset managers have begun shutting down tax-free money funds.
Investing for income in this environment is like trying to squeeze water out of a fistful of sand at high noon in Death Valley. The standard advice from pundits and financial planners is to squeeze more desperately: If you take a lot more risk, you can wring out a little more income.
You could, for instance, buy stock in electric utilities, banks and other financial companies, real-estate investment trusts or master limited partnerships in the energy industry. All offer the promise of high dividend income, often 4% and up. In recent years, especially since the financial crisis of 2008-09, all have been described as “bondlike” by promoters touting their supposed safety.
This year has subjected these assets to wholesale slaughter. In the first nine months of 2020, utilities lost 6%, real estate 7%, financials 20% and MLPs 49%, as measured by leading exchange-traded funds that invest in those sectors. (MLPs did a bit better, but not much, by other measures.)
The performance numbers include the dividend income these investments distribute. So even after earning big dividends, investors suffered even bigger losses. The income didn’t come with safety; it came at the price of safety.
Meanwhile, in the bond market, the siren song of low risk may never have been louder, says Nancy Davis, founder of Quadratic Capital Management LLC in Greenwich, Conn., and manager of the Quadratic Interest Rate Volatility and Inflation Hedge ETF. In late September and early October, she says, interest-rate volatility hit all-time lows in data going back to 1988.
With the Fed seeming to assure near-zero interest rates for years to come, says Ms. Davis, more bond investors may feel forced—or emboldened—to take extra risk.
She likens this dilemma to a scene of two nautical hazards in “The Odyssey” by Homer. “It’s like trying to steer between the Scylla of ridiculously low yields and the Charybdis of credit risk and interest-rate risk,” says Ms. Davis. “Even a little bit higher rates can cause you to lose a year’s worth of return in a day.”
One of Wall Street’s favorite adages is “Don’t fight the Fed.” That means that when the Federal Reserve is raising interest rates, which generally hurts the prices of stock and bonds, investors should be conservative. When the central bank is cutting rates or keeping them low, investors should be aggressive.
If you want to keep some of your money safe, however, you need to defy that maxim. You should fight the Fed.
I like to say that at least 90% of what makes investors successful isn’t knowing what to do, but knowing what not to do.
If you invested $10,000 in a 10-year Treasury note at this week’s prices, it would yield you less than $77 in income over the next 12 months. Even a 30-year Treasury will yield only $156 in annual income on a $10,000 investment.
So it’s never been more tempting to take extra risk with the money you want to keep ultrasafe. But knowing what not to do is vital.
Fooling yourself into thinking that you can find absolute safety in any asset yielding more than 1% is a terrible idea. We live in a 1%, if not a sub-1%, world right now. Nothing you do can change that.
You can earn 1.06% on up to $10,000 invested in I-bonds, inflation-protected U.S. savings bonds. You can shop around for savings accounts that yield almost 1% or CDs that yield a pinch more. But you have to recognize that anything above that comes with risks, and risks have consequences.
When your future self looks back at the decisions you face now, which will you regret more: Earning less income than you could have but keeping your cash safe, or earning higher income that came at the cost of destroying your capital?
T-Bills Headed For 0% May Force The Fed’s Hand
While all the focus has been on long-term yields, the front end of the curve is nearing the danger zone.
The Federal Reserve decided not to extend the weighted average maturity of its asset purchases at its meeting this week, with Chair Jerome Powell arguing that longer-term interest rates are already plenty low enough to bolster the economy through what are hopefully the final months of the coronavirus pandemic.
While many in financial markets were scrutinizing the potential implications of lowering 10- and 30-year yields, those who closely watch front-end interest rates were asking a much different question: What will the Fed do to keep short-dated Treasuries from hitting zero? That is to say, they had fewer qualms about the central bank buying a greater share of long bonds and bigger concerns about it not easing up on purchases of short-term securities.
You’d be forgiven for not paying too much attention to two-year Treasury yields, or the interest rates on even shorter-dated T-bills, which are the asset of choice for money-market funds and have traded in a minuscule range over the past six months. But zooming in, there’s no mistaking that these rates continue to grind lower, even as longer-term yields try to break higher. Without something to break the trend, this could quickly become an issue for the Fed, which has come out about as forcefully as it could against negative interest rates.
Part of the story is the persistent weakness in the U.S. dollar, which keeps setting new recent lows. A simple six-month chart that plots the two-year yield against the Bloomberg Dollar Spot Index shows a strong positive correlation of 0.684 (a value of 1 means they move in perfect lockstep, negative 1 means they’re perfect opposites). There seems to be a feedback loop at play between the two markets.
But a number of behind-the-scenes factors are also working to bring down short-end rates. Bank of America Corp. strategists Mark Cabana and Olivia Lima have been out in front of this for weeks, arguing earlier this month that a sharp decline in the issuance of Treasury bills, combined with an increase in bank reserves caused by the Treasury Department drawing down its cash balance with the Fed, will create a supply-demand imbalance so large that if it’s left unchecked, short-term Treasury rates could drop to 0% or lower.
The Fed doesn’t want that to happen, full stop. For one, it would potentially decimate the critical $4.34 trillion money-market industry. The funds already yield next to nothing and have been steadily losing cash since May — a rate of zero or less could very well encourage a mass exodus. Also complicating matters, the Treasury isn’t allowed to auction bills at negative rates.
Bank of America has some suggestions for the Fed. First, it could simply increase its interest rate on excess reserves, known as IOER, which is now 0.1%. That would create a greater incentive for banks to keep money parked at the central bank rather than gobble up shorter-term Treasuries, or at least push the market rates up slightly. Bloomberg Intelligence strategists Ira Jersey and Angelo Manolatos wrote Thursday that a five-basis-point boost could do the trick and that the central bank would likely spring into action if the fed funds rate falls to less than 0.07% on a lasting basis; the effective rate is at 0.09% now.
Another option: The Fed could sell short-dated Treasuries outright or allow bills to roll off its balance sheet as they mature. That, of course, effectively amounts to the same thing as extending the weighted average maturity of its bond purchases — the very same policy that officials chose to eschew this week. “The case for a Fed UST WAM extension is strengthened if it considers money market dynamics but we do not believe the Fed has seen sufficient evidence to justify such an action at this point in time,” Cabana and Lima wrote on Dec. 3.
After the Fed decision, I compared the central bank to a football team with a strong defense that prudently chose to punt. The same analogy applies when looking at front-end rates. It’s certainly possible that the central bank will need to alter the composition of its bond purchases to tame interest rates on T-bills sometime next year. But there are enough lingering questions out there, from the size of the next fiscal aid package to an earlier-than-expected debt-limit deal, to make staying the course the smartest policy.
Besides, Janet Yellen will most likely be the Treasury secretary when the Fed and Treasury need to navigate these various cross-currents together. “We expect greater Treasury and Fed cooperation on front-end dynamics given Yellen’s deep familiarity with money markets,” Cabana and Lima wrote. “We are confident the Fed and Treasury have adequate tools to keep front-end rates above zero, but do not expect them to act until markets force them.”
So far, short-term Treasuries haven’t reached a tipping point. Two-year yields, at 0.123%, are still higher than the 0.103% level reached in May. Shorter-term bills had negative rates during the worst of March’s market meltdown and dipped to 0% in previous years. It’s possible that just as the threat of Fed action is enough to keep longer-term yields from roaring higher, that same psychology may also work to prevent a race to zero on the short end.
Still, front-end rates have a way of forcing the Fed’s hand in a way that longer-term yields don’t. Investors may quibble about whether a 1% or 1.25% or 1.5% yield on 10-year Treasuries is enough to get the central bank’s attention. There’s no debate that 0% or less on shorter maturities is unacceptable. The Fed may yet have to bring the WAM in 2021 — just for vastly different reasons than many market observers thought.
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