Summary: On September 22, Eastern Time, Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Steven Mnuchin jointly testified before the U.S. House Financial Services Committee, drawing global attention to the signals they sent.
On September 22, Eastern Time, Federal Reserve Chairman Jerome Powell and U.S. Treasury Secretary Steven Mnuchin jointly testified before the U.S. House Financial Services Committee, drawing global attention to the signals they sent.
At the hearing, Powell reiterated that the Fed is committed to helping the U.S. economy weather the COVID-19 pandemic, and outlined actions taken so far. He said the U.S. economy has improved markedly, but the road to recovery remains long and requires further fiscal policy support. Mnuchin said he and the White House are still seeking to reach an agreement with both parties in Congress on a new stimulus bill.
However, analysts pointed out that with the Supreme Court nominee still hanging in the balance, a new round of coronavirus relief measures may be difficult to introduce before the November U.S. election.
In addition, despite the Fed's dovish signals, U.S. stocks continued to fluctuate in September. Analysts believe that with fiscal stimulus bills stalled and the Fed unable to take substantive "new" actions, U.S. stocks face the risk of further declines.
The U.S. economy has begun to improve. Since the outbreak of COVID-19, the Federal Reserve has lowered short-term interest rates to near zero and launched 13 emergency lending and liquidity facilities to ease market pressure.
Earlier, on August 27, Eastern Time, the Fed revised its "Statement on Longer-Run Goals and Monetary Policy Strategy." According to the statement, the Federal Open Market Committee (FOMC) will "seek to achieve inflation that averages 2 percent over time." Therefore, "following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time." This also means the FOMC will not raise interest rates until inflation has risen above 2 percent.
Powell noted that recent healthy economic data have benefited from the $2.3 trillion coronavirus stimulus act approved by Congress in March. "The result has been not only a rebound in employment, but also a gradual increase in personal income and personal savings. These factors have enabled the economy to respond with resilience to loan defaults and other problems that may arise in a major recession."
Li Huihui, a senior financial expert, said in an interview with 21st Century Business Herald that the effects of the Fed's March support tools, such as interest rate cuts and quantitative easing, were quite evident. Li added, "The ISM manufacturing and services indexes have stayed above 50, the unemployment rate has fallen from double digits to 8.4%, and consumer spending has recovered steadily. It is expected that GDP growth in the third quarter of this year will return to positive and rebound sharply to 20%." A latest Goldman Sachs report even projected U.S. GDP growth to rebound to 35% in the third quarter. In the second quarter, which just ended, U.S. GDP contracted 32.9%.
At the hearing, Powell also said the U.S. economy has improved. "Economic activity has picked up from its depressed second-quarter level, when much of the economy was shut down to contain the spread of the virus. Many economic indicators now show clear improvement." However, Powell noted that "employment and overall economic activity remain well below pre-pandemic levels, and the road ahead remains uncertain." He also stressed that the U.S. economy will eventually recover fully from this difficult period. "We will continue to use our tools to support the economy for as long as it takes." It is reported that the Fed's support programs can potentially provide more than $2 trillion in funds at various levels, though some facilities have low usage. The Main Street Lending Program, targeting small and medium-sized businesses, can provide up to $600 billion, but only about $2 billion has been used so far, while the facility allowing the Fed to buy corporate bonds in the primary market has not been used.
Powell said these support tools have in total released about half of their potential funds, and they would be on standby if market pressures reappear.
Although the Fed still has backup measures, Powell believes the U.S. economy has a long way to go to fully recover from the pandemic and needs further fiscal support. "The economic outlook will depend on the effectiveness of virus containment and policy actions by governments at all levels. In some cases, direct fiscal support is better than Fed lending," he said.
Chicago Fed President Charles Evans said on the 22nd that if Congress fails to pass a fiscal plan supporting the unemployed and state and local governments, the U.S. economy would face the risk of a longer and slower recovery, even if it does not lead to a full recession. "Fiscal support is fundamental." Evans projected that to bring the unemployment rate down to 5.5% by the end of 2021, at least $500 billion to $1 trillion in fiscal stimulus would be needed.
Mnuchin said he and the White House are still seeking to reach a bipartisan agreement with Congress on a new stimulus bill. "The President and I remain committed to supporting workers and businesses. I still believe a targeted package is necessary, and the administration is ready to reach a bipartisan deal." Li Huihui stressed to reporters that fiscal support is extremely necessary. "The Fed has lowered interest rates to near zero, and further monetary policy stimulus could fall into a "liquidity trap" risk. To avoid that risk and effectively boost the economy, strong fiscal policy stimulus is needed at this time, along with various measures to increase the multiplier effect of government spending, such as tax cuts and fee reductions, opening up monopoly sectors, direct cash rebates, and investment in infrastructure and public facilities. But at the same time, the Fed also needs to shift to unconventional monetary policy and adjust its structure as soon as possible, such as expanding asset purchases to risk assets, increasing purchases of short-term bonds, and transitioning from monetary easing to targeted credit easing." The new fiscal stimulus bill is expected to be difficult to pass before the election. However, since July, discussions in Congress on the size and scope of a new round of fiscal stimulus legislation have been stalled, and it remains unknown when a new stimulus bill will be introduced.
Analysts pointed out that after the death of Supreme Court Justice Ruth Bader Ginsburg, the choice of her successor has become a new point of disagreement between the two parties in Congress, which could affect negotiations on a new stimulus bill.
A World Bank analyst said that President Donald Trump's attempt to quickly fill the vacancy left by Ginsburg's death could cast a shadow over the prospect of introducing a stimulus bill before the November 3 election.
TD Securities analysts also said in a report that Republicans and Democrats in Congress, already deadlocked over a new round of economic stimulus legislation, are now focusing their attention on the fight over the Supreme Court vacancy, reducing the likelihood that a new bill will pass.
UBS economists wrote in a report that the Supreme Court vacancy could spur stronger competition between the two parties and replace issues such as COVID-19 and international trade as the main topic in voters' minds.
Jim O'Sullivan, chief US macro strategist at TD Securities, said: "Although we expect a package to be passed eventually, the likelihood that it cannot be passed before the election has increased significantly. That was already a possibility even before the Supreme Court suddenly became an issue." Chris Krueger, strategist at Cowen Washington Research Group, said that the chances of an economic stimulus package passing before the election now appear very small because "the battle over the Supreme Court vacancy could leave Congress breathless in November." Larry Kudlow, director of the White House National Economic Council, downplayed the impact of the Supreme Court fight. On September 21 local time, when asked whether it would make it harder for lawmakers to focus on another COVID-19 bill, Kudlow said "there is no need."
Krueger said, "We have been envisioning another [$1 trillion or $1.5 trillion] fiscal stimulus package, and the current impasse points to downside risks for the economy." O'Sullivan believes the Supreme Court seat battle "could also increase the odds of Democrats winning Senate seats in the election." Such an outcome would raise the likelihood of larger fiscal stimulus measures, which in turn could have a major impact on the speed of the economic recovery.
Goldman Sachs's analysis shows that "if the 2020 election results in a unified Democratic government, it could allow President Biden to pass a bill that significantly increases spending." Goldman Sachs expects this could prompt a faster-than-expected US economic recovery and bring forward the time when the Fed needs to begin raising interest rates by "up to two years."
However, UBS analysts noted that if Trump and the Republican-controlled Senate install a conservative judge on the US Supreme Court before the election, then if Democrats regain the Senate and Democratic presidential candidate Biden defeats Trump, "the Democratic policy agenda will be even more aggressive."
Li Huihui, meanwhile, said that the US economic recovery is still on a good track. He expects the economy to rebound sharply in the third quarter, while a true stabilization of the economy may not come until early 2021. According to his forecasts, US GDP growth will be -4.5% this year, and GDP growth will recover to 5.8% in 2021.
US stocks continue to face heavy downward pressure. From a market perspective, despite the Fed's dovish chorus, the three major indices have continued to fluctuate since September, with weekly declines for three consecutive weeks—the longest losing streak in nearly a year. Many once-coveted technology stocks have fallen by more than 20%.
Li Huihui explained to reporters that the recent US stock pullback was mainly caused by four reasons: First, Congress has still not reached agreement on a new round of fiscal stimulus legislation; second, the collective pullback of technology stocks—the main sector that had driven the Nasdaq index to record highs—had a significant impact on the broader market; third, the decline in risk-free rates lowered investor expectations and raised equity valuations, but the recent recovery of the 10-year Treasury yield to 0.7%, along with its gradual stabilization and rebound, has put pressure on discounted valuations; fourth, the approaching US election has increased overall capital market volatility.
Morgan Stanley chief cross-asset strategist Andrew Sheets said that the Fed's "average inflation targeting" policy, while a "new" policy, does not mean new actions. "Therefore, in the coming months, it should be economic data that drives the market, not the Fed." Hong Hao, managing director and head of research at BOCOM International, pointed out that the Fed's September policy meeting disappointed the market. "This is a market with a tendency toward self-harm whenever the Fed does not pump in liquidity. The logic of the Fed's so-called historic adjustment to its monetary policy thinking is self-contradictory. If the Fed believes its loose monetary policy can trigger reflation in the economy, then why does it emphasize keeping interest rates at zero for two to three years? If such monetary policy is ineffective, then why implement it? Therefore, the market's disappointment is justified." Mike Wilson, chief investment officer and chief US equity strategist at Morgan Stanley, argued that the recent correction was partly due to the fact that August's rally was driven by speculation from inexperienced retail investors. Therefore, "a better way to think about it is that the current decline is just a return to where we were before the rise, and that rise may not have been justified in the first place. Moreover, bull markets experience corrections along the way, and that is exactly what we are seeing now." Wilson stressed that the new round of fiscal stimulus being "up in the air," and the Fed's failure to provide any clear guidance on its quantitative easing program, had triggered the market correction. Wilson expects US stocks to fall another 10%, and the Nasdaq index could fall 15%.
Li Huihui also believes that US stocks will continue to face pressure in the short term, with further room for adjustment. Major indices have 10% downside, especially the tech-heavy Nasdaq index, which has 15% downside.
Li Huihui also said, "The short-term correction will be an opportunity to buy on dips. The S&P 500 index is expected to likely reach 3,600 points in the next 12 months, with 10% upside from recent levels. We favor cyclical stocks and small- and mid-cap stocks, with a sector bias toward financials, industrials, materials, and health care.