- Powell doesn’t completely rule out negative interest rates
- House to vote Friday on new $3 trillion stimulus bill
- Another 2.5 million people likely filed for unemployment benefits
- Chinese industrial production and retail sales expected to improve
Powell doesn’t completely rule out negative interest rates — Fed Chair Powell on Wednesday, as expected, threw some very cold water on negative interest rates, but he didn’t completely rule out the possibility that the Fed might consider negative rates someday in the future. He only said the Fed is not considering negative interest rates “for now.”
Specifically, Mr. Powell said, “The evidence on the effectiveness of negative rates is very mixed.” He added, “The Committee’s view on negative rates really has not changed. This is not something that we’re looking at. I know there are fans of the policy, but for now, it’s not something we’re considering. We think we have a good toolkit, and that’s the one we’ll be using.”
The federal funds futures curve showed little movement in response to Mr. Powell’s comments. The federal funds futures contracts from mid-2021 through early 2002 closed yesterday in slightly negative territory of minus 1-3 bp, illustrating that the markets believe that there is at least a small chance that the Fed in a year might adopt negative rates.
Mr. Powell gave a pessimistic view of the economy that startled stock investors and led to a -1.75% sell-off in the S&P 500 index on Wednesday. Mr. Powell said the pandemic raises concern about long-term economic harm. He also said that the outlook is highly uncertain and that the downside risks are significant.
Mr. Powell make a straightforward plea to Congress for more fiscal support. He said, “Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.”
House to vote Friday on new $3 trillion stimulus bill — The House on Friday is expected to vote on a new $3 trillion stimulus bill, containing about $1 trillion in rescue funds for state and local governments, another round of stimulus checks to individuals, and the extension of unemployment insurance.
Republicans unanimously rejected the package. Senate Majority Leader McConnell last week said that Senate Republicans remain on “pause” as they wait to see whether the stimulus already passed will be enough. However, Mr. McConnell on Tuesday took a step closer to some new legislation when he said, “We’re going to insist on doing narrowly targeted legislation if and when we do legislate again, and we may well.”
Republicans have so far been reluctant to provide any bailout money to state and local governments. However, they will see increasing political pressure as state and local governments are forced to engage in large layoffs to offset sharply reduced tax revenues and sharply higher pandemic expenses. New Jersey, for example, saw its tax revenues in April plunge by $3.5 billion or 60% from the year-earlier level.
Senate Republicans do not expect to move any legislation until June at the earliest. That means that Fed Chair Powell is not likely to get his wish for more fiscal stimulus for a number of weeks.
Another 2.5 million people likely filed for unemployment benefits — The consensus is that another 2.5 million people filed for unemployment benefits in the week ended last Friday. That would be the lowest figure in seven weeks, but would nevertheless highlight the massive number of people that are currently unemployed.
Businesses are still laying off people, adding to the number of people that are filing unemployment claims. The claims figures also remain high because state unemployment offices are catching up on their backlogs. Also, self-employed persons are being allowed to file for unemployment benefits for the first time and there have been delays in setting the rules and processing those claims.
A total of 33.8 million people have already filed for unemployment claims since mid-March. That represents 21.3% of the 158.8 million people that were employed in February, according to the Labor Department’s household survey. That suggests that the unemployment rate could be headed above 20% by May or June.
Indeed, Goldman Sachs on Wednesday forecasted that the unemployment rate will peak at 25%, much higher than its previous estimate of 15%. Goldman says that the unemployment rate will remain high and will end the year at 10%, roughly equaling the peak seen in the Great Recession.
The U.S. Labor Department last Friday reported that the U.S. unemployment rate soared to 14.7% in April, thus taking out the previous post-war record high of 10.8% posted in 1982. The Labor Department said that the April U-6 unemployment rate, which adds in discouraged and underemployed persons, soared to 22.8% in April.
The Fed yesterday released a report showing how the unemployment debacle is hitting lower-income households particularly hard. The Fed found that 40% of households earning less than $40,000 lost their jobs in March.
Chinese industrial production and retail sales expected to improve — The consensus is for tonight’s China’s April industrial production and retail sales figures to improve but remain in generally dismal shape. China has slowed its pandemic by enough to reopen most of its economy. However, China is now taking a hit from the fact that most of the rest of the world is in a partial shutdown. The consensus is for tonight’s April Chinese industrial production report to improve to +1.5% y/y from March’s -1.1% and April retail sales to improve to -6.0% y/y from March’s -15.8% y/y.