The Feds Unanswered Questions Are Piling Up

On Wednesday, Federal Reserve Chair Jerome Powell served up some cold, hard reality, saying the U.S. economy would shrink by 6.5% in 2020 and take two years to rebound. Today, stocks tumbled to a 10-week low, not helped by intensifying fears of a second wave of coronavirus. President Donald Trump took to Twitter to disagree: “We will have a very good Third Quarter, a great Fourth Quarter, and one of our best ever years in 2021.”

Did Powell sidestep too many questions？ Is the Fed choosing banks over people？ Is Powell allowing even bigger bubbles than Greenspan？ Bloomberg columnists took a close look at what Powell said, and what he meant.

Fed Shoots Down Notion of a V-Shaped Recovery: The Fed left unanswered two critical questions: How far could its asset purchases ultimately go and what does the disconnect between Wall Street and Main Street mean for future well-being？ “The most important underlying message of Wednesdays Fed meeting — the importance of a comprehensive policy approach that deals more effectively with productivity, employment, inequality and genuine financial stability — is also what would allow the inherent contradictions and unanswered questions to be resolved in a satisfactory and orderly fashion.” – Mohamed A. El-Erian

The Fed Is Choosing Banks Over People: The Fed has two aims: maximum employment and stable prices. Yet the central bank‘s latest economic projections suggest it won’t meet either of those goals in the next year and a half. “The Fed can help the American public in a time of obvious and dire need, or it can make sure that shareholders in large financial institutions dont suffer too much of a loss. Choosing the latter option seems like a clear abrogation of its statutory responsibilities.” – Narayana Kocherlakota

Powell's Ready to Play the Fresh Prince of Bubbles: Alan Greenspan, the Fed chief from 1987 to 2006, is infamous for allowing two bubbles to expand – in tech stocks and then in mortgage credit. Is this 1998 all over again？ “Liquidity released to help re-float the credit market naturally found its way to where it could make the best returns, which at the time was in tech stocks. And so the extraordinary Nasdaq bubble was born. The Greenspan Fed was in an invidious position, facing what looked a real possibility of an early version of the credit crisis that would eventually transpire a decade later. But the decision to blink and allow an asset price bubble to form had long-lasting consequences. Powells position, with the economy in a much weaker state, and with an election only five months away, is even more difficult.” – John Authers

Blame the Fed for the Disconnect in Markets: It‘s clear that small investors believe that markets are now designed for investors to win — just look at the S&P 500 Index’s about 43% gain since late March despite the worst economic recession since the Great Depression. “Speculation among small investors has risen to at least the bubble days of the dot-com boom of 1999. The online broker Robinhood reports that one-third of its accounts, which now total more than 14 million, were opened this year, with the bulk of these newbies joining since early March, when the Fed began supporting financial markets in moves that have expanded its balance sheet assets by almost $3 trillion to $7.17 trillion. Money manager Jeffrey Gundlach speculated this week on a webcast that people are using stimulus checks from the government to buy stocks.” – Jim Bianco

Fed Indicates Bond Traders Are Behaving for Now: Jerome Powell puts the Fed on cruise control, but he's keeping an eye out for traps. “The Fed has been paring back its buying gradually week by week, so locking in at current levels suggests Powell and his colleagues don‘t want to risk any sort of trouble with market plumbing as the Treasury Department ramps up bond sales to fund gaping budget deficits. ’We will closely monitor developments and are prepared to adjust our plans as appropriate to support our goals, Powell said. In other words: The Fed stands ready to buy more Treasuries if private investors suffer from indigestion.” – Brian Chappatta