Fed's Powell sees recovery starting in Q3, lasting through 2021

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The U.S. economy should grow in the third quarter of the year and, while it may take a while, Federal Reserve Chair Jerome Powell said he's "highly confident" it will rebound beyond the levels seen before attempts to slow the coronavirus pandemic shut down the economy.

Despite a "sharp" downturn that could see unemployment rise as high as 20%-25%, it will be "short" in duration, the Fed chair said in an interview on "60 Minutes" Sunday night. “We won’t get back to where we were by the end of the year, recovery could stretch through next year — we don’t know,” Powell said.

Federal Reserve Board Chairman Jerome Powell
Federal Reserve Board Chairman Jerome Powell

While the key to recovery is medical, especially developing a treatment or vaccine, Congress should do more, he said, and the Fed will do whatever it can, as needed. “There’s a lot more we can do, we have tons of ammunition left,” he said.

Those bullets might be needed down the road, he noted. “We should see recovery steadily through second half of the year but we can’t fully recover until people believe they are safe.”

And while the virus has not gone away, he said, it appears the downturn will be shorter downturn than in the 1930s during the Great Depression. “In the long run and I’d even say the medium run, I wouldn’t bet against the American economy,” said Powell.

Jeffrey Cleveland, chief economist at Payden & Rygel, said that for Powell, the sit-down was more of a chance to speak to Main Street than Wall Street.

“He was asked which specific data points he was following and replied that the real-time economic data is a function of how successful the social distancing measures are — saying he expects big declines in economic activity in the April-June period and significant increases in unemployment,” Cleveland said. “When pressed, he said 20-25% rates of unemployment were reasonable guesses for the peak in labor market distress.”

Powell wouldn't comment on whether a V-shaped recovery was still possible, noting that many uncertainties exist. By saying recovery could be continuing through 2021, Cleveland said, “I think he wanted to send the message to the American people that this will not be snapback recovery.”

As for a negative interest rate policy, Powell batted that idea down last week.

“From my perspective, I’m not sure how much NIRP matters anyway, especially if a move to NIRP would entail a small negative deposit rate (e.g., -0.20%),” Cleveland said. “Interest rates [are] already low across the curve (U.S. 10s have been hovering around 60 bps), and the Fed can expand its lending programs, expand asset purchases, target the yield curve or add to forward guidance. In sum, it would seem there are a lot of policy options still available before the NIRP route.”

Builder confidence posts solid gain
Builders' confidence rose in May, with the National Association of Home Builders/Wells Fargo Housing Market Index rising to 37 in May from 30 in April. The index had plunged to 30 in April from 72 in March, its largest one-month drop.

Economists surveyed by IFR Markets had expected the index would be 33.

“The fact that most states classified housing as an essential business during this crisis helped to keep many residential construction workers on the job, and this is reflected in our latest builder survey,” said NAHB Chairman Dean Mon. “At the same time, builders are showing flexibility in this new business environment by making sure buyers have the knowledge and access to the homes they are seeking through innovative measures such as social media, virtual tours and online closings.”

Business leaders survey
Activity in the New York service sector declined sharply in May, according to the Federal Reserve Bank of New York’s Business Leaders Survey.

The business activity index narrowed to negative 75.8, little changed from last month’s record low of negative 76.5.

The business climate index crept to negative 92.9 from negative 94.3 last month.

Looking six months ahead, the expected business activity index was at negative 4.9, compared with negative 30.7 in April.

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