Fed Chair Jerome Powell sat down for a 60 Minutes interview on Sunday night. It was reminiscent of former Fed Chair Ben Bernanke's interview with 60 Minutes in March 2009 which coincided with the stock market bottom. In that interview, Bernanke was very forceful about the Fed's powers to prevent another Great Depression, and its vast, untapped powers. At the same time, he was brutally honest about the economic devastation due to the housing bubble bursting, and the years it would take to undo the damage.
Power of Central Bank Language
Powell struck similar notes in his interview. He was very pessimistic about the economy but went to great extents to highlight that the Fed was "not out of ammunition by a long shot" left such as more asset purchases, changing the mix of asset purchases, and more aggressive use of forward guidance. Powell, like Bernanke, understands that the Fed can achieve a lot just by communicating its intentions clearly and forcefully. Think about ECB President Mario Draghi who stopped the Euro's freefall during the 2012 crisis by saying that the ECB would do "whatever it takes" to prevent the EU from plunging into depression.
The S&P 500 (NYSE: SPY) was 4% higher Monday, although some gains can be attributed to positive developments in a vaccine against the coronavirus. Unlike the bulk of the recovery rally so far, most gains came from beaten-down sectors like banks, energy, and small-caps. Markets are interpreting Powell's words as lowering the risk of default.
Economic Pessimism
While Powell was optimistic about the Fed's capabilities, he was very dour on the economic outlook. He expects job losses to continue over the next couple of months with unemployment to reach 20-25%, and second-quarter GDP to show an annualized contraction between 20 and 30%. Perversely, this is bullish for asset prices, since it means a more dovish Fed for longer, similar to how Bernanke kept loosening policy until 2013 until he felt that the economy was on a self-sustaining path.
He also encouraged Congress to continue spending more money to make up for decreased household and business spending, adding that this wasn't the time to worry about consequences of debt given the potential, permanent damage to people's lives, and the economy's productive capacity.
Powell expects the economy to start growing again in the third and fourth quarters, although he thinks it could take more than a year for it to reach pre-coronavirus levels. However, he cautioned that a lot depended on medical developments that the Fed wasn't qualified to judge. In his view, combatting the coronavirus and enduring a short-term loss of economic activity was worth it as a second wave could lead to even more damage and a permanent loss of confidence.