With interest rates near zero, Federal Reserve policy makers are likely to turn attention to other steps they could take to ensure a strong U.S. economic rebound once the coronavirus lock-down ends.
The Federal Open Market Committee is all but certain to keep its benchmark overnight rate in a target range of 0-.25 per cent, where it was lowered at an unscheduled FOMC on March 15 to help soften the pandemic’s blow.
The committee will release a statement at 2 p.m. with Chairman Jerome Powell holding a press conference 30 minutes later. Forecasts are not scheduled to be released at this meeting.
“Never underestimate the Fed,” said Diane Swonk, chief economist with Grant Thornton in Chicago. “The Fed will affirm it is still willing to use all tools at its disposal.” A Bloomberg survey of economists expects the central bank to keep rates near zero for three or more years.
Facing an unprecedented disruption that has put 26.5 million people out of work in the last five weeks, the Fed has slashed rates and pledged up to US$2.3 trillion in loans to aid businesses and state and local governments.
Powell can expect questions on whether the Fed is prepared to expand the scope of some of its lending programs, provide assistance to specific industries, and is it considering yield-curve targeting, among other topics.
Here’s a preview of what to expect:
The Fed has already announced an expansion of its lending to municipalities to include smaller cities and counties than initially planned. Another area that might need support is mortgage servicers, and Powell has previously noted the important role the housing market plays in the economy.
In addition, Treasury Secretary Steven Mnuchin has raised the possibility of extending aid to oil companies struggling with the collapse in the price of oil. But that prospect may face significant hurdles because the central bank is averse to lending to specific industries to avoid picking winners and losers.
Because lending facilities are authorized by the Fed’s board of governors, they could be announced in conjunction with an FOMC meeting or at another time.
Forward guidance for interest rates will be a key issue for the committee. At the last meeting, the FOMC said it would keep rates near zero until the economy weathers the crisis and moves toward meeting the central bank’s full employment and price stability mandates.
“The current forward guidance is confusing,” said Roberto Perli, a former Fed economist and partner at Cornerstone Macro LLC in Washington. “I expect the FOMC to clarify and lean more” in the direction of meeting its mandates, which may mean zero rates for several years.
Some Fed watchers advocate officials adopt specific thresholds to anchor how long they will keep rates near zero, including reprising targets the Fed used back in 2012 to assure investors that there would be no rate hike until unemployment falls to a certain level and inflation rises.
But this meeting may be too soon to provide that level of guidance, which is deliberately designed to stimulate economic activity, given millions of Americans are still sheltering from the virus at home.
What Bloomberg Economists Say
“As consequential as Fed actions have been over the past several weeks, Bloomberg Economics expects the April FOMC meeting to be comparatively quiet with no major policy announcements.”
— Carl Riccadonna, Yelena Shulyatyeva, Andrew Husby and Eliza Winger
The committee will need to adjust its statement to reflect very weak economic data since the last meeting, including record jobless claims, rising unemployment and falling consumption. First-quarter economic growth likely declined by the most since the last recession, according to economists surveyed by Bloomberg.
“I’d expect the opening paragraph to reference the grim employment and consumer spending data that have come out, as well as the unprecedented decline in energy prices and the broader disinflationary forces that are at work,” said Jonathan Wright, economics professor at Johns Hopkins University in Baltimore and a former Fed economist.
The FOMC is also certain to discuss its balance sheet expansion with purchases of Treasury notes and mortgage-backed securities during the crisis.
It has bought hundreds of billions of dollars of bonds in recent weeks, ballooning its balance sheet to a record US$6.57 trillion and declaring on March 23 that its purchases would be open-ended and “in the amounts needed to support smooth market functioning.”
But it has more recently been scaling back the buying as market conditions calmed, though it continues to add to its securities holdings.
While the Fed has primarily been buying assets to smooth market functioning, one option would be to explicitly shift to say it was buying securities to try to push longer term rates lower as a financial stimulus measure also known as quantitative easing.
That might be an announcement for the months ahead as the economy reopens, rather than this meeting with the lock-down still in place in many parts of the U.S.
Yield Curve Control
Yield curve control — a cousin of QE — where the Fed announces it is targeting a specific yield for a specific maturity of Treasury securities, has been discussed by policy makers including Governor Lael Brainard as an option to strengthen the central bank’s forward guidance.
At the moment the Fed sets the overnight rate and allows market forces to determine longer-term borrowing costs.
The Bank of Japan began experimenting with yield-curve control in 2016 and currently maintains a target of 0 per cent for the yield on 10-year government bonds, versus a target of -0.1 per cent for its benchmark rate. Advocates say the benefit is a central bank may have to purchase fewer assets overall if it commits to pegging yields at a certain maturity.
Again, it may be too soon for the Fed to announce a decision to adopt such a measure — but Powell could certainly flag it as a possibility in the future if it comes up during the press conference.
Interest on Reserves
Officials could tweak a secondary rate, known as interest on excess reserves, which helps to keep their benchmark rate in its target range. But that would be a technical move, not a change in policy.
The effective rate — the average rate paid by U.S. banks when borrowing dollars overnight from other banks — dipped to 0.04 per cent on April 27 after trading at 0.05 per cent for most of April. The Fed has on multiple occasions adjusted IOER when the effective rate drifted to within 5 basis points of the range’s upper or lower bound.
Powell, in his recent public appearances including on NBC’s “Today” show on March 26, has tried to strike a reassuring posture, noting that while the economy is declining, this is not a typical downturn and he remains hopeful for a robust recovery.
“Powell is unlikely to change his tone much, while reiterating his recent optimism that there’s no reason that the economy can’t quickly recover following the end of the Covid-19 pandemic,” said Tom Garretson, senior portfolio strategist for RBC Wealth Management.
Province's decision to reopen economy still lacks some clarity: CFIB – HalifaxToday.ca
The Atlantic Vice President of the Canadian Federation of Independent Business says he’s pleased with the province’s decision to reopen the economy, but adds it still lacks some clarity.
On Wednesday, Premier Stephen McNeil announced the province’s next steps to reopening the economy, saying businesses that were required to shut down due to the COVID-19 pandemic will be able to restart operations on June 5.
Jordi Morgan told NEWS 95.7 he’s happy to hear this, but adds there are still some questions that need to be answered.
“It remains to be seen how well this happens because we’re still not entirely clear on what all the requirements are for these individual businesses,” said Morgan.
Morgan is also pleased with the province’s new small business reopening and support grant, a $25 million fund that will help businesses welcome back customers safely.
“Very happy to see that because there are a number of businesses that are going to require some bridging to reopen, invest in personal protective equipment and other things that are necessary in order to operate the business,” said Morgan.
He says once they get all the guidelines in place, they’ll have a better idea of how to operate and keep both the public and employees safe.
Nearly 40% of the economy may vanish in Q2 because of COVID-19, but then do something surprising – Yahoo Canada Finance
The S&P 500 has crossed the 3,000 level again and investors are clearly riding high on hope for a second half economic recovery post the worst of COVID-19.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="But that doesn’t mean the market is immune to a pullback this summer primarily because the economic data will likely continue to be horrible. Remember bulls, the U.S. economy has been kicked in the face by the pandemic, and a rebound won’t happen overnight simply because states are reopening. Corporate sales and profits remain under severe strain, sending many off to explore bankruptcy or cut thousands of workers even with quarantines being lifted.” data-reactid=”17″>But that doesn’t mean the market is immune to a pullback this summer primarily because the economic data will likely continue to be horrible. Remember bulls, the U.S. economy has been kicked in the face by the pandemic, and a rebound won’t happen overnight simply because states are reopening. Corporate sales and profits remain under severe strain, sending many off to explore bankruptcy or cut thousands of workers even with quarantines being lifted.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="“We think that the reported unemployment rate may be around as high as 20% in May,” Barclays chief U.S. economist Michael Gapen warned on Yahoo Finance’s The First Trade. The unemployment rate in April increased by 10.3 percentage points to 14.7%.” data-reactid=”18″>“We think that the reported unemployment rate may be around as high as 20% in May,” Barclays chief U.S. economist Michael Gapen warned on Yahoo Finance’s The First Trade. The unemployment rate in April increased by 10.3 percentage points to 14.7%.
Gapen believes the U.S. economy may contract a whopping 40% annualized in the second quarter, then surprisingly grow by 25% in the third quarter and 8% in the fourth quarter.
Part of Gapen’s cautiousness on the economy in the second quarter stems from his outlook on the consumer, which comprises two-thirds of the U.S. economy as is often cited.
“I think when we move into the third quarter, the savings rate will start coming down. All else equal, we are expecting the consumer to remain cautious. I think you will see a blend. Some return to normalcy, but it will take time,” Gapen explains. “Negative wealth is still at play. Equity markets are doing well, but the average household may not feel that. And I think that there will be caution and a preference for saving.”
To be sure, recent economic data warrants the markets taking a short-term breather.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Another 2.123 million Americans filed for unemployment benefits in the week ending May 23. Over the past 10 weeks, more than 40 million Americans have filed for unemployment insurance. U.S. durable goods orders tanked 17.2% in April, U.S. Commerce Department data showed Thursday. Durable goods dropped 16.6% in March.” data-reactid=”34″>Another 2.123 million Americans filed for unemployment benefits in the week ending May 23. Over the past 10 weeks, more than 40 million Americans have filed for unemployment insurance. U.S. durable goods orders tanked 17.2% in April, U.S. Commerce Department data showed Thursday. Durable goods dropped 16.6% in March.
Pending home sales in April fell 33.8% year over year, the National Association of Realtors said Thursday. That marked the biggest decline since January 2001.
“I think the market has priced in that April is probably the worst of the economic data,” explained Sevens Report Research founder Tom Essaye. “While it looks like the worst is behind us — which is great — we need to start to see more improvement.”
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.” data-reactid=”37″>Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Read the latest financial and business news from Yahoo Finance” data-reactid=”38″>Read the latest financial and business news from Yahoo Finance
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.” data-reactid=”50″>Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, SmartNews, LinkedIn, YouTube, and reddit.
France Paves Way for Economic Restart After Taming Virus – BNNBloomberg.ca
France will lift domestic travel restrictions and allow most bars, restaurants and museums to reopen as the country slowly unfreezes its economy following weeks of stringent controls to contain the coronavirus epidemic.
While France won’t completely return to normal, it can ease restrictions starting on Tuesday as confinement measures proved more effective than expected in combating the spread of the disease.
“Freedom will finally become the rule again, and prohibition the exception,” Prime Minister Edouard Philippe said Thursday, following a cabinet meeting. “The results in terms of public health are good, even if we remain cautious.”
From the coming weekend, the state will accelerate plans to restart schools, reopen parks and scrap a rule limiting travel within France to 100 kilometers. The government favors opening internal European Union borders from June 15, while leaving a decision on travel beyond the bloc to the EU.
In areas including Paris and the surrounding region, lifting curbs will be slightly slower. Bars and restaurants will only be able to open outdoor spaces, and sports centers will not open until the next phase starting June 22.
France is following other major European economies in relaxing restrictions on the public. Germany has already undertaken a broad restart of businesses. In Spain, cafes and restaurants in Madrid and Barcelona re-opened this week, and foreign tourists should be allowed in again from July without a two-week quarantine.
Greece is also relaxing curbs on travels, re-opening restaurants and allowing foreign tourists from mid-June.
Economic pressure to relax the rules was mounting in France after it implemented one of the strictest lockdowns. For two months, locals were banned from going more than one kilometer away from their homes without a justification.
The government eased some restrictions earlier this month, following a drop in the number of severe Covid-19 infections. But the economy has continued to suffer with activity around 21% below normal levels, according to estimates from national statistics agency Insee, which expects France’s 2020 contraction to be deeper than the 8% the government forecast.
“A new front is opening today: The country will have to fight against the impact of a historic recession,” Philippe said.
The French state has already announced a plan to revitalize the car industry and will announce another plan for the aircraft sector next week.
The government has also earmarked 18 billion euros ($20 billion) for the hard-hit tourism industry, which represents around 7% of GDP. France has suggested domestic tourism would be possible during the summer with some restrictions, but that trips to foreign countries could remain on hold.
Read More: Tourism Slump Has Holiday Destinations Scrambling
The restaurant and hotel industry has warned that social-distancing measures could dent profitability in the long run, as fewer people will be able to be catered to and costs will rise.
©2020 Bloomberg L.P.
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