Key Takeaways from Fed Chair Powell’s 60 Minutes Interview

In a speech last Wednesday, Federal Reserve Chair Jerome Powell, spooked markets when he warned that the economic recovery will be “prolonged and bumpy”. Although Powell’s forecast for a prolonged recovery should have come as no surprise, the S&P closed down 2.26% for the week, its worst week since March 20 when the index lost nearly 15%. We’ve learned that even a simple statement from the Fed Chair can cause markets to swing wildly in either direction. Investors parse his every word for direction on economic forecasts and for signals about potential monetary policy shifts. So needless to say we were highly anticipating yesterday’s interview with CBS reporter, Scott Pelley on 60 Minutes.

Before we jump into the details of the interview, let’s recap some of the actions taken thus far by the Federal Reserve to promote economic and financial stability:

·        Near-Zero Interest Rates

·        Forward Guidance that Rates will Remain Low

·        Provided Support to Keep Financial Markets Functioning

·        Security Purchases - Massive Quantitative Easing

In addition to these measures, the Fed has created or revived (from 2008) a number of emergency lending programs to support liquidity in the financial system1:

We can see that the Fed has had a strong and quick response thus far in its fight against economic instability caused by this pandemic. The Chairman was asked in last night’s interview to compare what the Fed is doing right now with the unprecedented action it took in 2008. Chair Powell said, “The things we’re doing now are substantially larger…a multiple of the programs that were done during the last crisis. And it’s very different this time…they were providing support for the banking system. Here, really, the problems are in what we call the real economy, actual companies that make and sell goods and services.” Powell, when summarizing the goal of the recent Fed actions, said “we are trying to help businesses avoid avoidable insolvencies and the same for individuals, keep families solvent.”2

With all of the action taken by the Fed thus far, many are questioning if there is any ammo left to fight a possible second downturn. Chairman Powell refuted the claim that the central bank had exhausted its power, saying “we’re not out of ammunition by a long shot2” and that there was “no limit2” to what the Fed can do to lend money to financial markets. “So there’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to2,” Powell said. He went on to say the Fed could enlarge existing lending programs or even start new ones. Markets love the idea of limitless monetary stimulus as witnessed by today’s sharp rally in equities, but the monetary hawks have to be shaking their heads in disgust. 

When asked about the long-term consequences of this debt spree, Powell said now is not the time to worry, “It is true that deficits are going to be big for a couple of years here. And we’ll have to deal with that. The time to deal with that, though, is when we’re through this recovery.”2

A big question that we would all love to have the foresight to answer is just how long will the recovery take? How long before our economy will be operating at full strength again? And can there be a recovery without a reasonably effective vaccine? Chairman Powell was asked a similar set of questions to which he responded, “…assuming there’s not a second wave of the coronavirus, I think you’ll see the economy recover steadily through the second half of this year. I do think that people will be careful about resuming their typical spending behavior so certain parts of the economy will recover much more slowly. Things that we do that involve being around lots of other people…may have to wait the arrival of a vaccine. But in any case, the economy can start getting better fairly soon.”2

We’re now expecting an economic contraction in Q2 of 20-30% and hearing possible unemployment numbers in the range of 20-25% with 36 million Americans filing for unemployment since mid-March. The fact that we had such a strong economy and workforce just 3 months ago makes these figures even more unfathomable. Powell had this to say about the US workforce, “…my sense is that it’s likely that we’ll have a couple more months of net job losses. Then, assuming that the economy does begin to re-open and we do that successfully, you’ll see people going back to work. The good news is those who’ve been laid off overwhelmingly report themselves as having been laid off temporarily…and expect to go back to their old job. So I would say the peak unemployment might be in the next couple of months and then coming down over the second half of the year.”2

Overall, I would say the tone of Chairman Powell was quite positive given what he called “a time of great suffering and difficulty.”2 He’s certainly not calling for a V-shaped recovery as many are suggesting but when asked what gives him hope, he said the following, “In the long run, you wouldn’t want to bet against the American economy. This economy will recover. And that means people will go back to work. Unemployment will get back down. We’ll get through this2”. He went on to add, “We have a great economy. We have highly industrious people. We have the most dynamic economy in the world. And we’re the home of so much of the great technology in the world. So I think we’ll get back to the place we were in February; we’ll get to an even better place than that.”2

1https://www.americanactionforum.org/insight/timeline-the-federal-reserve-responds-to-the-threat-of-coronavirus/

2https://www.cbsnews.com/news/full-transcript-fed-chair-jerome-powell-60-minutes-interview-economic-recovery-from-coronavirus-pandemic/