The Week in Review: June 15, 2020
“We're Not Even Thinking About Thinking About Raising Rates”
That statement came from Fed Chief Jerome Powell after the Federal Reserve kept interest rates unchanged last Wednesday (Fed press conference transcript).
For the full year, the Fed expects gross domestic product (GDP), the largest measure of goods and services, to contract by 6.5% in 2020 before rebounding 5.0% next year. It also projects the jobless rate will decline to 9.3% by year end (Federal Reserve June Economic Projections).
Given limited visibility, the range of projections from each Fed official is unusually wide.
Despite the unexpectedly upbeat May employment report and a Fed forecast for a single-digit jobless rate at year end, Powell isn’t declaring victory.
He reiterated that the Fed stands ready to use all its tools to support the economy in what he described as an “extraordinarily uncertain” outlook (Fed transcript—Fed chairman’s press conference).
Powell said he expects the economy to begin a recovery in the second half of the year, but the trajectory is highly uncertain. Powell used the word “uncertain” or “uncertainty” 10 times in his one-hour press conference.
A Recession and Thursday’s Sell-off
Last Monday, the National Bureau of Economic Research (NBER) officially declared that the economy peaked in February and a recession has begun.
The NBER acknowledged, “The usual definition of a recession involves a decline in economic activity that lasts more than a few months,” but it more heavily weighted the “unprecedented magnitude of the decline in employment and production” in its decision.
It may end up being the shortest recession in history (when activity hits bottom, not a recovery to the prior peak). Nonetheless, the record 128-month economic expansion is officially over.
That brings us to Thursday’s 1,862-point decline in the Dow. The sell-off was blamed mostly on talk of a spike in COVID-19 cases in some states and Powell’s more sobering outlook.
We are seeing an uptick in cases in California, Texas, Arizona, and Florida (respective state health departments). Mix in Powell’s tone and recent market optimism (some might say euphoria), and the market was ripe for a pullback.
The Dow has risen an astounding 48% from the March 23 bottom through its Monday peak (St. Louis Federal Reserve).
Outside New York, however, new COVID-19 cases are in a downward trend.
If we include New York, cases would be declining at a faster pace, as New York had been the epicenter of the pandemic. New cases in the state have fallen sharply over the last two months.
It’s not that we are out of the woods. Spikes in various states shouldn’t come as a complete surprise as economies reopen and the public grows weary of masks and social distancing.
What happens to the economy will likely depend on the path of the pandemic and the success in developing a readily available vaccine.
If you have any questions or concerns, feel free to reach out to me, Tyler, or Will.
Two for the Road
Social Security’s COLA is linked to the consumer price index (CPI). There’s a subset of CPI, known as CPI-E, which tracks elderly spending. Those expenses have grown more rapidly year-over-year, but COLA adjustments don’t reflect those growing expenses, so Social Security benefits have actually lost 30% of its buying power since 2000. —MarketWatch, May 30, 2020
“No man can think clearly when his fists are clenched." —George Jean
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