Midweek Macro – 4.29.2020

In the current version of normal, almost all meetings have become virtual. The Federal Reserve’s regular assembly of the Federal Open Market Committee is no exception to this phenomenon.

Fed Chair Jerome Powell and his fellow interest rate gurus will conclude their April meeting via videoconference today and Chair Powell will deliver its policy statement at 2PM. Markets are not expecting the FED to make any adjustments to rates, but instead expect Chair Powell to reiterate the FED’s promise to do whatever it takes to keep America’s economy chugging along.

Last month the FED said that it would keep rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” This was really a non-answer to the question of how long they’ll keep rates at zero – they don’t know yet, and we already know that the FED’s dual mandate is to achieve full employment while keeping inflation at bay. Economists at JPMorgan aren’t expecting Powell to discuss the outlook for the economy (as he might in normal times) because there are so many uncertainties tied to the virus that many forecasts are futile.

Barclays’ economists expect the FED to lay out specific targets for inflation and employment levels that they’re monitoring as they look at the future of interest rate policy post-COVID lockdowns. That doesn’t mean investors are expecting the FED to stop their massive injections of stimulus and backstopping anytime soon, but are relying on the FED to bring a little more clarity to these uncertain times.

Powell is not expected to roll out any new programs today, but will likely be questioned more about the options at the body’s disposal following up on Powell’s comments last month that the FED “is not going to run out of ammunition.” As Congress hits gridlock, especially when it comes to supporting state governments, the FED expanded its lending program for state and local governments this week enabling them to buy short-term bonds to help these governments raise cash for staff wages and other bills. The government accounts for ~18% of total GDP in the U.S. and so it’s just as important to keep cash flowing through the sector, not to mention the need for state and local coordination of virus fighting efforts.

Speaking of GDP, we finally got to see the official Q1 GDP reading that economists on every news outlet have been speculating about – it doesn’t look great. The U.S. economy shrunk by 4.8% in the first quarter which is mostly attributed to the social distancing measures that really took deep root in March. Some forecasters are expecting $2-5 trillion of output to be lost by year’s end, which accounts for a reduction in productivity of 10-20% as the drop in Q2 is expected to be sharper than we just saw in Q1. As we sift through these lagged economic datapoints, we must remember to keep our eyes on the horizon and that a lot of the forecasts here are riddled with heaps of uncertainty.

It all comes down to how quickly we can find a vaccine/treatment, how quickly we can improve contact tracing, and how creative we can get with restructuring the economy and labor markets to get through this crisis.

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