Powell says Fed will remain vigilant dealing with coronavirus effects on U.S. economy

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After the Federal Reserve voted to keep interest rates steady at its latest meeting, market analysts on Thursday said the central bank was doing all it could do to keep the U.S. from falling into an economic depression.

The Federal Open Market Committee on Wednesday left the target range for the Fed funds rate unchanged at zero to 0.25% and announced no new policy initiatives.

At the press conference after the meeting, Fed Chair Jerome Powell said the Fed was doing everything in its power to help people and businesses deal with the pandemic.

Powell "went into great detail about the depths of the losses already incurred. He underscored the uncertainty about the duration of the crisis,” said Diane Swonk, chief economist at GrantThornton. “The outcome is dependent upon how quickly the virus itself is contained as well as the support provided by governments to blunt the blow.”

She said Powell made a rare plea for more fiscal support in response to the crisis.

“He was quite direct in his language that we will be needing more support from Congress,” Swonk said. “The Fed is limited in that it can lend but not spend. The latter is the purview of Congress. Powell is clearly ready to do more to leverage spending by Congress if needed.”

Others said that the Fed was remaining focused on how to keep the U.S. from falling into a deep recession.

“We are already heading for a recession as shown in the recent GDP numbers, but just how severe it will be remains to be seen,” said George Boyan, president of Leumi Investment Services. “Chair Powell said numerous times in his press conference that they would be ‘forceful, proactive and aggressive’ in combating the effects of the economic shutdown.

"When is the last time you heard a Fed chair use the words forceful and aggressive when it comes to monetary policy? Usually those words instill fear. But in this case, it might just be that the Fed is instilling confidence,” Boyan said.

Looking ahead, others said it could be a while before the Fed was confident enough about the situation to slow quantative easing.

“A scheduled FOMC meeting must feel like light relief at the Fed at the moment, with no less than 10 domestic credit facilities newly announced (or reactivated) in response to the crisis,” said Brian Coulton, chief economist at Fitch Ratings. “The statement reaffirms the open-ended QE commitment and signals interest rates are going nowhere until the Fed is confident that the U.S. economy has ‘weathered recent events.’ It could take a long time before the Fed feels confident about that — we don’t see pre-virus GDP levels being reached until 2022.”

Swonk said economists expected more support will be needed going forward.

“Powell has been one of the lone voices in Washington, D.C., to underscore that the current crisis is wreaking havoc on businesses and individuals through ‘no fault of their own.’ He has made it the Fed’s mission to keep firms and households solvent through the crisis but it cannot carry the economy alone,” Swonk said. “More is needed. The consensus among economists is that we will need another $2 trillion in aid and stimulus added to the nearly $3 trillion Congress has already approved.”

Separately, the Fed said Thursday it was expanding its Main Street Lending Program. The Fed developed the program to help credit flow to small and medium-sized businesses that were in sound financial condition before the pandemic. It is now opening up loan options available and increased the maximum size of firms eligible for support.

Jobless claims fall, remain high
Initial jobless claims fell 603,000 to 3.839 million in the week ended April 25, from the previous week’s revised level of 4.442 million, originally reported as 4.427 million, the Labor department said.

The four-week moving average fell to 5.033 million from the previous week's revised average of 5.790 million, originally reported as 5.787 million.

The advance seasonally adjusted insured unemployment rate rose to 12.4% for the week ending April 18 from 10.9%, the highest level of the seasonally adjusted insured unemployment rate in the history of the seasonally adjusted series.

The advance number for seasonally adjusted insured unemployment during the week ending April 18 rose to 17.992 million from the previous week's revised level of 15.818 million, originally reported as 15.976 million. This marks the highest level of seasonally adjusted insured unemployment in the history of the seasonally adjusted series.

The largest increases in initial claims for the week ending April 18 were in Florida (+326,251), Connecticut (+68,758), West Virginia (+31,811), Louisiana (+12,270), and Texas (+6,504), The largest decreases were in New York (-189,517), California (-127,112), Michigan (-85,500), Georgia (-72,578), and Washington (-60,980).

Chicago PMI falls
The Chicago Business Barometer, produced with MNI, fell 12.4 points in April to 35.4, its lowest level since March 2009.

As business confidence dipped sharply amid the current spread of COVID-19, the demand for labor cooled significantly, with the employment index falling 11.1 points in April to the lowest level since June 2009.

Among the other main indexes, new orders and production saw the biggest declines as supplier deliveries rose.

Production dropped by 19 points in April, hitting the lowest level since June 1980. After slipping in March, demand faded to a near 40-year low. The 21 point drop in new orders was the largest decline on record as firms noted a severe negative COVID-19 impact on both demand and production.

Fed: Midwest Economy Index falls
The Midwest Economy Index fell to negative 1.02 in March from negative 0.16 in February, the Federal Reserve Bank of Chicago said.

Contributions to the March MEI from three of the four broad sectors of nonfarm business activity and all five Seventh Federal Reserve District states decreased from February.

The relative MEI increased to 0.26 in March from 0.02 in February. Contributions to the March relative MEI from two of the four sectors and three of the five states increased from February.

Personal income, spending fall in March
Personal income decreased 2.0% in March after increasing 0.6% in February, the Commerce Department reported as spending plunged 7.5%.

Personal income declined $382.1 billion in March. The decrease in personal income primarily reflected a decrease in compensation as wages and salaries fell 3.1%.

Real disposable personal income decreased 1.7% in March and real personal consumption expenditures dropped 7.3%.

The PCE price index declined 0.3%. Excluding food and energy, the PCE price index decreased 0.1%

“The decline in March personal income and outlays was, in part, due to the response to the spread of COVID-19, as governments issued ‘stay-at-home’ orders," Commerce said. "This led to rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted, or redirected their spending.”

The decrease in real PCE reflected a decline of $829.9 billion in spending for services and a $104.9 billion in spending for goods.

Personal outlays decreased $1.16 trillion in March while personal saving was $2.17 trillion and the personal saving rate was 13.1%.

“The shutdown in activities in the second half of March led to a 7.5% m/m decline in current-dollar consumption (consensus: down 5.1%) and a 7.3% m/m decline in real (inflation-adjusted) consumption," according to Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy, and U.S. Economist Roiana Reid. “Both are the largest monthly declines on record going back to 1959. The decline in April’s consumption will be even larger, reflecting a full month of shutdown.”

They said this month should show the worst of the disruption.

“April should be the worst month for consumption,” Levy and Reid said. “Some states are allowing select activities to resume in May and June which will translate into automatic increases in consumption but from very depressed levels.”

They added that consumer confidence will be critical in shaping the recovery and individuals will need confidence that the acute stage of the pandemic has passed and that normal activities are safe.

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