Fed pushes the market
None of it was news, but when the president of the US system of central banks says it, it still makes an impression. Yesterday Fed Chairman Jerome Powell gave a speech for the Peterson Institute for International Economics and didn’t come up with a nice message. “The magnitude and speed of the economic downturn has no recent precedent,” Powell said. That creates uncertainty. Moreover, he warned that the recovery will take time and that the current liquidity problems could become solvency problems. According to Powell, the corona crisis could cause lasting damage to US households (unemployment) and businesses (bankruptcies) if policymakers in governments do not change course quickly. He referred in particular to the U.S. Congress, where Democrats and Republicans are regularly at loggerheads with each other, as a result of which no decisions are taken. According to him, additional fiscal support can be costly, but is still worthwhile if it helps to prevent the long-term economic damage that could lead to a stronger recovery of the economy. So Powell indicated that now it is the government’s turn and not the central bank. The financial markets faintly reacted yesterday to the speech of the Fed president and closed lower. Today the mood hasn’t changed yet and we see some money being taken off the table.
Negative interest rates?
Fed-watchers were also looking forward to the speech because Powell had been put under pressure for the umpteenth time via Twitter by president Trump. The U.S. president is still demanding that the (independent) Fed cuts interest rates, even though they are currently at zero. This would mean that the US central bank would also have to apply a negative interest rate. However, Powell has already indicated that a negative interest rate is not an instrument considered by the Fed. He confirmed this yesterday.