April 30, 2020


The U.S. economy started the year like a lion but ended the first quarter like a slaughtered lamb.  Social distancing, sheltering-in-place and closing of non-essential businesses caused both demand and supply shocks and large swaths of the economy to come to a halt.  The first estimate of the Gross Domestic Product (GDP) came in -4.8% annualized quarterly growth rate with the expectation of a worse reading in the second quarter.




The leading edge of the pullback in economic activity became evident in March’s economic data that was released in April.  Historically weak labor statistics (unemployment claimes reaching 30 million over the last 6 weeks), consumer spending (8.7% plunge in retail sales, personal spending down 7.5%) and factory output (industrial production declining 5.4% in March).  The economic data is expected to continue to paint a dire picture of the impact of COVID-19.


The sudden stop to economic activity in March heightened the levels of financial stress, causing financial conditions to tighten to the point the markets were called “broken.”  The Federal Reserve responded quickly and aggressively by easing monetary policy via rate cuts and additional Quantitative Easing (QE) and unleashing an alphabel soup of lending facilities.  While financial sentiment has improved on the back of significant monetary and fiscalstimulus, market dislocations and elevated volatility levels still remain.  One notable market dislocation was in the oil market.  At expiration the May West Texas Intermediate (WTI) futures contract traded at a negative price, the first time ever.  With much of the global economy on lockdown demand slumped at a time of a lack of available storage capacity.


Going into its April 28-29 meeting, the Federal Open Market Committee (FOMC) faced two levels of uncertainty.  The first uncertainty is the coronavirus.  There is little to nothing the Fed can do about it.  The second level of uncertainty is the economic response to the coronavirus and to the policies implemented by the government and the central bank.  Having already moved aggressively on the funds rate, QE and lending programs that will take time to work through the system, the markets, analysts and economists were not expecting any major announcements from the meeting.  The policy statement following the meeting had no new information other than the coronavirus “poses considerable risks to the economic outlook over the medium term.”  The Fed pledged to continue to take aggressive action to support an eventual recovery.



In his press conference, Fed Chairman Jerome Powell reiterated that the Fed will keep its key short-term interest rate near zero for the foreseeable future.  With forecasts on the pandemic and the economy being “unusually uncertain” he said it was hard to be precise about when the economy rebounds.  He also braced the public and the markets about very ugly economic data ahead, specifying that the next jobs report may show a double-digit unemployment rate, manufacturing likely to fall more rapidly in April, and second quarter economic activity to fall at an unprecedented rate.  In sum, Powell’s affirmation the Fed was “all in” and would do more if needed.

Boom or Bust

With tentative signs that the COVID-19 pandemic is easing in some regions of the country, some governmental entities have turned their attention to start lifting their shutdowns.  However, there is a high degree of uncertainty in the pace of re-opening with worrying signs of resilience of the coronavirus leading to increased worries of a second wave of infections should retrictions be lifted prematurely. Economic activity’s recovery and growth is dependent upon the pace of re-openings, success in limiting the spread of the virus and development of a vaccine.  When that occurs, the Fed will lag removing accommodation to let the economy get a full head of steam.  Such a policy move is not expected until after the national elections and in the first half of 2021.