Dovish doves at the Fed
The Federal Open Market Committee delivered the expected monetary policy decision on Wednesday evening, keeping the Fed Funds target rate unchanged at 0 to 0.25%. Chairman Jerome Powell then went one further at his press conference, sending a clear signal that there will be no upward move for at least two years.
The Fed is “strongly committed to using our tools to do whatever we can for as long as it takes”, said the chairman and, for the avoidance of doubt, “we’re not even thinking about thinking about raising rates. One canny journalist asked Mr Powell about the risk of Fed stimulus creating a bubble in asset prices. The chairman looked shifty and avoided a direct answer.
The supporting documentation put the Fed’s estimate for gross domestic product growth this year at -6.5%, with unemployment ending the year at 9.3%. GDP growth was estimated at 5.0% for 2021 as the economy rebounds and 3.5% in 2022 as it settles back to normal. The Dot Plot showed only two FOMC members expecting a rate increase before the end of 2022. Although a good deal of FX activity followed the press conference, the dollar is unchanged on the day against the euro.
UK hardest hit
Ahead of the Fed’s growth predictions the OECD released its own economic outlook. The report began with health warnings that the global economy is “on a tightrope” and the outlook is “highly uncertain”. It reckons US GDP will shrink by 7% or 8% this year.
The OECD expects Britain’s economy to fall by 11.5% this year if there is no renewed flare-up of Covid-19 and by 14% if there is a second wave. The media have focused on the idea that Britain will take the biggest economic hit, especially if a no-deal Brexit has “a strongly negative effect on trade and jobs”.
Although none of what the OECD said should have come as a shock to investors, they did feel an obligation to react to the gloomy prognosis. Sterling had a mostly losing day, down by an average of 0.2%. It gave up 1% each to the safe-haven yen and franc and 0.5% each to the euro and US dollar. The pound was not helped by a ten-year low for the RICS house price balance, released at midnight.
More hurdles ahead
Sterling has a clear run for the rest of Thursday, at least as far as UK ecostats are concerned. On Friday morning, however, it will have to contend with the output and trade data for April as well as the flash GDP estimate for that month. They will not be pretty.
With the production statistics it is almost a matter of throwing a dart. There is a sort of consensus that manufacturing output will have fallen by 16% on the month with industrial production down by 15%. A double-digit monthly contraction in GDP is all but guaranteed.
It might or might not be of consolation to see this morning’s industrial output data from Italy. The guess there is that output in April was down by 40% from the same month last year and 24% below March. Today’s weekly US jobless claims will be of particular interest following Friday’s surprisingly strong employment report.