Powell Agrees: This is Temporary

Guess who agrees with yours truly that economic damage in reports and forecasts is only temporary? None other than Federal Reserve Chairman Jerome Powell.

He said yesterday on the Today show:

“This is a unique situation. People need to understand, this is not a typical downturn. What’s happening here is people are being asked to close their businesses, to stay home from work, and to not engage in certain kinds of economic activity. And so they’re pulling back.

“At a certain point, we will get the spread of the virus under control and at that time confidence will return, businesses will reopen, and people will come back to work.

“So you may well see significant rises in unemployment, significant declines in economic activity, but there can also be a good rebound on the other side of that, and that’s actually one of the main things we’re trying to do by assuring the flow of credit in the economy and keeping rates low, is to ensure that that rebound, when it does come, is as vigorous as possible.”

 

Federal Reserve Chairman Jerome Powell on the Today Show, 26 March 2020

 

When asked whether we are already in a recession or if it’s inevitable we will soon be in one, Powell answered:

“We may well be in a recession, but again I would point to the difference between this and a normal recession. There’s nothing fundamentally wrong with our economy. Quite the contrary. The economy performed very well right through February. We’ve got a 50-year low in unemployment the last couple of years. So we start in that position. This isn’t something that’s wrong with the economy. This is a situation where people are being asked to step back from economic activity.”

He agrees with Dr. Anthony Fauci that the virus will dictate the timetable.

When asked whether the Fed’s activity presents risks that will need to be faced later, such as inflation, Powell said he does not believe so:

“We don’t see that. What we see, though, is [businesses having trouble getting credit]. We step in and replace that. That’s a very health thing, a positive thing. We’re providing relief, we’re providing stability, we’re trying to create a bridge from our very strong economy to another place of economic strength. That’s what our lending really does. It’s very broad [helping businesses of all sizes, as well as state and local governments].”

Will the Fed run out of bullets? No: “When it comes to this lending, we’re not going to run out of ammunition.”

He said the main stimulus helping families and businesses now is the fiscal package that just passed Congress. That will provide immediate relief. The Fed’s part will become more critical in the rebound, which it is going to turbo charge:

“The help from the Fed will be when the economy begins to rebound, then we’ll be there to make sure that rebound is as strong as possible. …

“This is a unique situation, it’s not like a typical downturn. We’ve asked people to step back from economic activity really to make an investment in our public health, they’re doing that for the public good. This bill that’s just passed is going to try and provide relief and stability to those people.

“The Federal Reserve is working hard to support you now, and our policies will be very important, when the recovery does come, to make that recovery as strong as possible.”

Investors, take note.

Buy or hold. Do not sell.

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6 Comments

  1. Henry Mourad
    Posted March 28, 2020 at 3:14 am | Permalink

    I like what Powell is saying and I totally agree with it. The economy is dormant at the present time but not in a recession.

    I know it’s hard to take, hearing of all the people that contracted the virus, especially the ones that died from it. I’m optimistic and remain so because I know It is greatly different than other downturns.

    The government is doing its part by providing temporary relief for all the idled workers. In a true recession, work and support is not available. Unemployment lasts a great deal of time and recovery is slow. My hope is that by early June we have flattened the curve and we’re beginning to see life as normal again.

    As far as oil is concerned, the government must have someone in charge of the Strategic Petroleum Reserve. It’s a shame so often we don’t sell at least 50% when prices are unreasonably high and don’t buy at prices like it is now. This could have given support to all the workers in the shale industry.

    Thank you Jason for keeping us sane in this time period.

    • Posted March 28, 2020 at 9:06 am | Permalink

      Thank you, Henry. My thinking mirrors Powell’s, too.

      The government is taking advantage of cheap oil prices to top up the SPR. That’s good to see. Also, cheap oil is usually considered an economic stimulus. It would help airlines in the recovery, for example.

  2. He Who
    Posted March 27, 2020 at 11:15 pm | Permalink

    I’m afraid that the reassurances from Chair Powell may only constitute another variation on the tune chosen while whistling past the graveyard. Yes, this virus will pass but as for the health of the economy….

    1. Completely apart from Covid19, our global economy is in the midst of an oil shock. Would that had been enough to push the US economy into contraction? Purely hypothetical at this point. But when one considers the effect on demand from Covid19, the price of oil is no longer compressed due to the geopolitical positioning of Russia and the Saudis. Small banks and frackers are completely scrambled at prices below 40. It is only through government intervention (“we are not going to run out of ammunition”) that they will make it to “another place of economic strength”.

    2. Some of the best (objective) research suggests that the best way to truly suppress this pandemic will be “rolling lockdowns” in an “on/off” nature. Lockdowns prevent the development of ‘herd immunity’, so to avoid extending the scourge into 2022, the models (based on the best data out of China and Italy and the Diamond Princess) are showing we might do better to have 30 day lockdowns followed by 30 days of social distancing with activity (rinse, repeat). With the models showing that by doing so we can increase our health care capacity to minimize the deaths that will inevitably occur and an ability to completely suppress the virus by mid 2021. (The hope is that a vaccine will be widely available by that time.)

    3. Cash is a position.

    I think this is a time for thoughtful objective reasoning. Jerome Powell is doing well to “buck us up” but I remain skeptical of anything that fails to acknowledge the full picture. The full picture (to me) shows that with the government’s full involvement at this point there is no real price discovery going on, and this is no longer a market that is pricing off value, but bailouts. Buyer, beware!

    • Posted March 28, 2020 at 9:02 am | Permalink

      Maybe it’s a market that:

      1. Priced for total economic shutdown, hence the vertical crash.

      2. Is now pricing for support via bailouts.

      3. Will one day reprice back to the healthy economy Powell described.

      Cash is a position, but the least profitable over time. The best time to deploy cash is into depressed stock prices. Gradually is fine, but it must be deployed.

  3. K. Lacey
    Posted March 27, 2020 at 8:34 pm | Permalink

    Jason, I was not able to figure out how to comment on the 6 minute video on YouTube, so I use this chance to tell you I thought it very well done. While the news outlets on TV and printed often look for the sensational to keep their advertising revenue solid, you present a calm, reasoned approach. Thank you.

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