Fed Says Worst of COVID-19 Shutdown Could Be Behind Us

Vito J. Racanelli

It appears that the U.S. stock market and the Federal Reserve are in agreement that the U.S. economy is bottoming, and the way forward is looking up.

Equities have certainly shot up in anticipation since the March 23 low by over one third, even in the face of heavy doubts by investors and low shouts from the bears. Unlike the pessimists, we, on the other hand, have advocated that the market rally was discounting the effects of the economic shutdown as mostly transitory and looking ahead to potentially better times in 2021. I’ll admit that the market has certainly outstripped my optimism.

Now the Fed is suggesting that the economy could have bottomed. Speaking to Bloomberg TV Wednesday, Fed Bank of New York President John Williams indicated he thought that the worst of the economy’s decline from the coronavirus crisis might be over.

“Based on what we are seeing now, I think we are pretty close, maybe May or June will be the low point right now based on the data we are seeing…[though] even if we are starting to see perhaps stabilization there in terms of the economy and maybe a little pickup, we are still in a very difficult situation.”

His view is that there is room to grow again toward the strengthen seen early in 2020, helped along by central bank policy. “…Hopefully we’ll start seeing improvement in coming months,” Mr. Williams said. “I expect to see a pretty significant rebound in the second half of this year.”

Well, there you have it out of the horse’s mouth. The Fed’s policy remarks are not off the cuff or uncoordinated. For the record, America saw a 4.8% contraction in 1Q.

Williams suggested the central bank has a diverse tool kit. The Fed is also considering more guidance about the future direction of interest rates and “yield-curve control,” where the central bank takes action to actively manage borrowing costs across different maturities. “This is something we are thinking very hard about,” he said. The NY Fed head also noted he thought inflation would remain low “over the next year or so.”

It’s interesting that Williams came out and said what he did, for the Fed’s beige book of anecdotal data from around the country is not particularly happy reading. In the most recent few weeks through mid-May, U.S. businesses saw limited evidence of a recovery, with economic activity continuing to decline amid the coronavirus pandemic, the Fed said.

The labor market continued to deteriorate and consumer spending fell further as retailers and restaurants remained largely closed in most of the country through mid-May, the Fed said in its periodic report of anecdotes from businesses around the country known as the “beige book.”

The latest edition of the beige book contains information through May 18, some two months after nonessential businesses around the country shut down to help contain the spread of the novel coronavirus. Remember the beige book looks back. The market looks ahead.

The yield on the benchmark 10-year U.S. Treasury note was 0.65% vs 0.66% one week previous. Upcoming FOMC meeting on June 9-10.

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Vito J. Racanelli
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