The much-awaited speech from Fed’s Chair Powell yesterday sent the US equity markets on a sharp move lower. Not that he was expected to deliver something new, but the markets were waiting for some more info about the impact of COVID-19 on the US economy. Powell delivered.
Compared with the last time he spoke, in the aftermath of the previous FOMC meeting, Powell did not sound so determined anymore. If earlier, he announced that the Fed stands ready to do more, to act rapidly and powerful, this time the tone changed. He still vowed that the Fed would act and support the economy, but he did not sound so convincing anymore. In trading and central banking language, it is all about trust, and confidence. Yesterday, both seemed to have been missed.
The Crude Reality Presented by the Fed
Besides reiterating what the Fed did so far, Powell acknowledged that more is needed. Much more. As an argument, he even presented a terrifying statistic – almost 40% of United States households making less than $40,000 per year, lost a job in March.
Suddenly, the United States has not only an economic problem on its hands but a social one too. The savings rate in the States was at record low levels even before the current crisis, meaning that the average American family did not have an extra thousand dollars to access in case of an emergency. This is an emergency – one of a kind.
An interesting fact is that during this pandemic, numerous financial assets are correlated to the US stock market evolution. The famous risk-on/risk-off market movements that dominated financial markets years ago are back in force, albeit with different actors, with implications all the way to the currency market.
Perhaps the most interesting question after yesterday’s speech was the one referring to the possibility that the Fed will introduce negative interest rates. Powell answered that the Fed is not looking into that at the time – it is not on their agenda.
But traders and investors familiar with the encrypted language central bankers are forced to use, noticed that he did not say no. He actually did not reject the idea with a clear no – he simply said negative rates is something the Fed does not consider.
Investors might add “yet.”