Fed Minutes

The Minutes of the Latest FOMC Meeting are out. For a change they are interesting, and also very long.

Eight Key Points

  1. Treasury market functioning was severely impaired. Market depth was extremely thin, and bid-ask spreads widened sharply.
  2. Financing conditions for nonfinancial firms were strained.
  3. Corporate bond issuance came to a near standstill around late February. Speculative-grade issuance and leveraged loan issuance virtually stopped.
  4. Financing conditions in the commercial real estate (CRE) sector worsened late in the intermeeting period, as issuance of CMBS slowed and spreads widened notably to around levels seen in 2016.
  5. Real GDP was forecast to decline and the unemployment rate to rise, on net, in the first half of this year.
  6. A stronger dollar, weaker demand, and lower oil prices were factors likely to put downward pressure on inflation in the period ahead and observed that this meant that the return of inflation to the Committee's 2 percent longer-run objective would likely be further delayed.
  7. A few participants also remarked that lowering the target range to the Effective Lower Bound (ELB) could increase the likelihood that some market interest rates would turn negative, or foster investor expectations of negative policy rates.
  8. Such expectations would run counter to participants' previously expressed views that they would prefer to use other monetary policy tools to provide further accommodation at the ELB.

PIMCO Estimates 30% GDP Decline

If you are looking for guesses, here's another one: U.S. GDP will contract 30% in second quarter, 5% in 2020

The forced closure of businesses across the United States and surge in unemployment due to the coronavirus pandemic will force U.S. growth to contract by 30% in the second quarter and 5% overall in 2020, Pacific Investment Management Co (PIMCO) wrote on Wednesday.

Richmond Fed on Restoring Consumer Confidence after COVID-19

Richmond Fed president Tom Barkin discusses Restoring Consumer Confidence after COVID-19.

This pandemic is new for all of us, creating unprecedented uncertainty. First and foremost, families are asking how best to protect their health and safety. But Americans are also asking about the health of the economy. How deep will this downturn be? How long will it last? How fast will we recover?

The answer to the first question is now clear: it will be deep. The service sector is 70 percent of the US economy and broad swaths of it are shut down, including travel, non-food in-store retail, restaurants, sports and entertainment. Last week’s initial unemployment claims exceeded 6 million, nearly doubling the previous week’s 3.3 million. The previous high had been 695,000 in 1982.

The duration is of course not fully knowable, but — absent a remission or treatment of the virus — it is hard to imagine social distancing moderating until there is a significant slowdown in new cases.

With rates at zero and fiscal support at historic scale, there is significant financial stimulus to help bring the economy back. But that will only meet its full potential when customers are ready to spend. Businesses and governments will need to innovate to make them comfortable doing so.

Barkin Misses the Fundamental Setup

We do not know the recession duration. But the fundamental setup is easy to see.

Consumer balance sheets were generally poor heading into this crisis. Too many people were already living paycheck to paycheck.

Barkin does have some interesting questions worth reviewing.

  • Could restaurants offer explicit deep cleaning protocols for their tables, less server contact or less dense seating to allay health concerns when eating out?
  • Should airlines fly with middle seats empty and boarding/deplaning protocols that preserve social distance?
  • Should personal services pivot to an at-home delivery model?
  • Is there a screening protocol for anyone who enters a hotel or a restaurant or a bar?

If any of those are done, to any extent, it means less profit for business.

Importantly, even if none of those things are done, the likelihood things quickly return to normal are nonexistent.


Sure, there will be a sudden wave of eating out once people can, simply to get the hell out of the house.

But following that initial surge, what then? Will people resume pre-virus habits?

Boomers vs Millennials

  1. Boomers had a quarter of their retirement blow up in a month.
  2. Millennials have seen two economic crises in 10 years, at the beginnings of their careers.

Things will not quickly return to normal and stay there even if there is some initial appearance of a recovery.

How High Will the Unemployment Rate Rise in April?

Tiffany Wilding, a North American economist at PIMCO, said today "evidence from recent jobs reports suggests the unemployment rate may rise as high as 20%."

That is essentially my base forecast.

On April 6, I asked (and answered) How High Will the Unemployment Rate Rise in April?

I estimate 20-22% a couple ways. I do not know Wilding's rationale, but I look at high risk job categories and put percentages on them.

The scars of 20% unemployment will last a long, long time. And even when employment returns, hours worked remains another issue.

Car Sales, Airline Travel, Eating Out

With the stock market down and consumer savings wiped out, will car sales quickly recover?

The same question applies to eating out and airline travel.

Will business meetings be in person or will corporations reduce costs with more teleconferencing?

For a 20-point discussion of what to expect, please see Nothing is Working Now: What's Next for America?

No V-Shaped Recovery

Add it all up and you should quickly arrive at the correct viewpoint: The Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.

Simply put, a quick return to business as usual is not in the cards.

Mike "Mish" Shedlock

Dallas Fed President Sees "No Movement" in the Fed Funds Rate

Dallas Fed President Robert Kaplan made some interesting comments today on interest rates, repos, and the coronavirus.

How Much Recession Warning Did You Expect?

How often have you heard the stock market looks a year ahead of a recession?

Fed has Recession Tools, Promises to Use them Quicker Next Time

New York Fed president John Williams is yapping today about recession tools and ability to use them quicker.

“Monetary Buffers Depleted” Boston Fed: Concerns Over Next Recession Mount

In a recession, the Fed typically slashes interest rates 5 PP. No such buffer exists. A Fed study looks at the impact.

How Long Before the Fed Tries to Manipulate Long-Term Rates Lower?

The Fed pledged to hold interest rates low for a very long time. What about the long end of the curve?

How the Fed's Inflation Policies Crucify Workers in Pictures

Every month, pundits comment on average wages. But median wages best explain how the Fed's policies crucify workers.

Bond Market Disagrees With Fed Economic Assessment: So Do I

Fed Minutes Show Concern Over Trump's Tariffs in Otherwise Bullish Assessment.

Fed Minutes Highlight Coronavirus Concerns and Uncertainty 8 Times

The minutes from the Fed's January 28-29, 2020 FOMC meeting show coronavirus concerns.

Huge Interest Rate Dislocations: Did the Fed Cut Too Much?

A series of charts shows new fed-sponsored interest rate dislocations. Let's dive into the charts.