Today’s Fed meeting and subsequent press conference by Fed Chair Powell was like no other in history. First off, Powell said, “We are going to see economic data for the 2nd quarter that is worse than any data we have ever seen”, this after the 1 quarter GDP contracted at a 4.8% annualized rate, the worst reading since 2008. Also, Powell’s speech and Q&A was virtual, with reporter questions being asked via a webinar. He expressed some hope for a significant bounce back in the 3rd quarter as stay at home measures are gradually rolled back. Of course, so much is dependent on the virus. Markets rallied significantly today on positive news regarding a potential treatment.
Full Range of Tools: The Fed Funds rate will remain at near zero for a while (possibly for 2-3 years) and the Fed continues to purchase about $10-15 billion per day in Treasuries and $8 billion in mortgage bonds, daily injections of capital into the repo markets.
Up next: A Main Street Lending Program will provide 4 year loans to businesses too large to benefit from the PPP program and more purchases of corporate debt. But, Powell noted that the Fed is authorized to “provide loans not grants” and the most vulnerable American individuals and businesses are not in a position to pay back loans as they have been hit so hard by this crisis. “This is the time to use the great fiscal power of the United States to do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible”. Powell declared in a direct message to Congress to provide this aid. He is implying that the fiscal policy so far is good but not enough and he is continuing to push monetary policy to the limit. Focus on central banks continues tomorrow with the ECB’s policy announcement. Bank of Japan opened the week on Monday pledging unlimited bond buying, as the international adoption of Modern Monetary Theory continues. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners