February 29, 2020


January data released during February indicated the U.S. economy remained on decent footing, a view shared by Federal Reserve Chairman Jerome Powell in Report on Monetary Policy to Congressional Committees.  The minutes of the Federal Open Market Committee and comments from Committee members suggested their view on the economy remained cautiously optimistic and that current stance of monetary policy was appropiate for a time to support sustained expansion of economic activity.  But, just as weakness in business activity appeared to be stabilizing the Fed warned that spillovers from the coronavirus (COVID-19) outbreak presented new risks to the outlook.


Stocks vs 10 Yr TNote



The COVID-19 situation is very fluid at this point and the full scope of the outbreak needs to become more clarified.  The Fed had been treating it as a transitory event, but the virus has spread much more quickly and has been more lethal than originally anticipated.  This has spooked the financial markets as investors perceive the coronavirus as a real threat to the global economy.  It has become the primary driver of the markets, causing a shift out of foreign assets into U.S. assets with Treasuries the destination for global money in search of safety, sending yields plummeting across the curve.  As investors ramped the flight-to-quality, the markets have become de-sensitized to upbeat domestic data and are convinced the Fed will be forced to ease rates and/or up the level of quantitative easing to cushion the U.S. economy against global slowing.

Consumer Sentiment Spending

Often perceptions of external shocks generate doomsday scenarios and outrun reality, causing markets to overreact to the news cycle.  The Fed remained on standby on the belief fundamentals are still supportive of growth.  Consumers are still providing fuel for the U.S. economy’s growth engine.  The consumer remains in good shape thanks to resilient hiring and wage growth.  Elevated personal savings, low interest rates and healthy confidence levels should continue to underpin consumer’s outlays and the housing market rebound.  However, the struggles in the industrial sector will be ongoing as a result of the Boeing 737 Max production shutdown and supply chain disruptions as a result of the coronavirus outbreak.

Industrial Production GDP


U.S. inflation remains subdued.  The impact of the virus falling more heavy overseas has strengthened the dollar, furthering the lack of pricing powers for domestic producers.  Commodity prices have also dropped on concerns of lower demand that could result in an oversupply situation.  Lots of goods chasing few buyers leads to lower prices, an over-simplified definition of dis-inflation.  This is also being closely monitored by the Fed as they remain concerned about inflation persistently running too low and keeping inflation expectations at very low levels.

Fed Funds vs Core Inflation

During the initial emergence of the coronavirus, the Fed seemed to be resolved to hold rates steady in the near term.  They believed the economy is in a good place and will wait for “a time” to see how conditions will evolve.  Muted inflation will keep the Fed from raising rates, but the central bank had also set the bar high for further rate cuts.  The COVID-19 virus, being the latest wild card, could have a significant impact on the global economy with a possible spillover effect on the U.S.  It has roiled the global markets and tightened financial conditions.  The Fed is now expected to provide further monetary accommodation in response.  This was further emphasized in a statement released on Friday, February 28th by Fed Chairman Jerome Powell, lowering the bar for a rate cuts.  “The fundamentals of the US economy remain strong.  However, the coronavirus poses evolving risks to economic activity.  The Federal Reserve is closely monitoring developments and their implicatins for the economic outlook.  We will use our tools and act as appropriate to support the economy.”