The new economic projections of the FOMC members reflect a big but temporary boost to growth from the fiscal stimulus and the normalisation of economic activity as the adult population is vaccinated. They expect a limited, temporary increase of inflation. Four participants now expect that the circumstances would warrant an increase in the federal funds rate next year. Seven expect this to be the case in 2023. Fed chairman Powell was quick to point out that the projections are not a committee forecast and that the data do not justify a change in policy. This message clearly anchors short-term interest rates, whereas longer-term bond yields fluctuate on the waves of ease or unease about where the federal funds rate could be several years into the future.
With deaths from Covid-19 having exceeded the startling level of 500,000 in the US, other cheerier statistics have driven the markets forward; The acceleration in the vaccination campaign, which has already administered 100 million doses, and the associated fall in the number of new cases, to close to their lowest level since the pandemic began, have, day by day, built hope that the crisis is nearing its end...
Until recently, the rise in long-term interest rates did not stop the equity market from moving higher, but events this week suggest investors are becoming increasingly concerned. The possible impact of higher bond yields on share prices, depends on what causes the increase: faster growth, a decline in uncertainty, rising inflation expectations.The last factor is the trickiest one because it may cause a profound reassessment of the outlook for monetary policy. Over the past two decades, the relationship between rising rates and the equity market has not been statistically significant. Gradualism in monetary policy has played a role. Recent statements by Jerome Powell show he is very much aware of the importance of avoiding to create surprises.
The dire state of the labour market requires a major support effort for the economy. This view is shared by Fed Chairman Jerome Powell and Treasury Secretary Yellen. The massive fiscal stimulus plan prepared by the Biden administration has received criticism from prominent economists. They argue that the plan is too big and could trigger a sizeable increase in inflation. In deciding on the size of the fiscal plan, risk management considerations play an important role. Doing not enough is clearly the greater risk. However, doing a lot will eventually force the Federal Reserve to demonstrate its independence by not shying away from raising rates despite the impact on government finances.
Even as the Covid-19 pandemic spreads to more victims than ever in the United States, there have never been such high hopes for a recovery. With the number of deaths averaging nearly 3000 a day since January 15 – 50% more than during the April 2020 peak – the health situation remains persistently bad. Yet vaccination campaigns are also accelerating...
Since March 2020, exceptional measures to bolster liquidity have resulted in a significant expansion of banks’ balance sheets. Fearing that leverage requirements could hamper the transmission of monetary policy and affect banks’ abilities to lend to the economy, the authorities have temporarily relaxed such requirements in the US (until 31 March) and in the eurozone (until 27 June). In the US, although the temporary exclusion of reserves and Treasuries from leverage exposure (the denominator of the Basel ratio) is automatic for large bank holding companies, it is optional for their depository institution subsidiaries. The latter can only make use of the exclusion if they submit their dividend payment plans (including intra-group dividends) for supervisory approval
Academic research shows that certain investors look at single stock call options as lottery tickets. They are aware they can lose money but nurture the hope of very big gains. To some extent, the share price behaviour in recent days of certain US small cap stocks illustrates this thinking. The combination of herd-type momentum buying and a short squeeze has caused huge share price swings. Should this become a recurrent phenomenon, it might reduce the informational efficiency of equity prices, increase the required equity risk premium and influence the cost of capital of companies.
In recent months, the dollar has weakened versus the euro although the real bond yield differential between US Treasuries and Bunds has increased. Amongst the factors that may explain this development, Federal Reserve policy is particularly important through its impact on capital outflows from the US and currency hedging behaviour of eurozone investors.The biggest risk for a change in direction of the dollar would be a repetition of the ‘taper tantrum’ of 2013 with the Federal Reserve starting to point towards a possible beginning of the normalisation of its policy. However, such a change in guidance is not to be expected anytime soon.
The health and economic situations in the USA will get worse before they get better. Winter conditions and travel over the festive period have produced a resurgence of Covid-19, whose rate of transmission is breaking all records: 225,000 new cases per day on 13 January (7-day average) or 68 cases per 100,000 people, a contamination rate twice that in the European Union (EU)...
The 46th president of the United States, Joe Biden, will face a difficult mandate. At the time of his inauguration on 20 January 2021, he will inherit a sluggish economy, as the Covid-19 pandemic continued to worsen with a human toll of tragic proportions. Looking beyond the health crisis, the new Democratic administration will have to act on political and social stages that have never seemed so antagonistic at the dawn of a new decade. With his reputation as a man of dialogue, Joe Biden will need all of his long political experience and skills in the art of compromise to try to heal America’s divisions.
In the US, the behaviour of the equity market versus the level of employment is very different in the current recession compared to previous recessions. The recession this year stands out because of its sudden, enormous job losses, which were quickly followed by a significant albeit very incomplete recovery. The equity market, after a huge drop, has rebounded swiftly and made new highs although earnings –on a 12 month moving average basis- still have to rebound. For 2021, more than anything, earnings growth matters.
The US mortgage market – the epicentre of the 2007-2008 financial crisis – has yet to be reformed. Nearly half of the USD 10,000 billion in housing loans are guaranteed by the Federal government via two private agencies (GSE), Fannie Mae and Freddie Mac, which were placed under FHFA conservatorship after they were bailed out in 2008. In recent weeks, there have been growing rumours that the FHFA is seeking to hasten the end of its conservatorship of the two agencies. Accelerating this process risks restricting household access to mortgage loans by prematurely ending the GSE Patch
Even if a vaccine is made available soon, it will take months for the USA and the rest of the world to recover from the traumas of the Covid-19 pandemic. Although the US economy is amongst those to have seen the best recoveries so far – notwithstanding comparison with China – it still bears many scars, some of which are clearly visible in our barometer...
With nearly 80 million popular votes and 306 members in Electoral College out of a total of 538, the Democrat Joe Biden won the US presidential election. His rival Donald Trump was beaten, but not by the landslide margins predicted by the polls. The Republican Party even gained seats in the House of Representatives and may hold on to its Senate majority. President-elect Joe Biden’s mandate promises to be especially tough, and his biggest challenge will be to overcome the political and social antagonisms. In the short term, the president-elect’s top priority will be to combat an ever worsening health crisis
On 20 October banking regulators finalised the transposition into American law of the Basel Net Stable Funding Ratio (NSFR)* liquidity requirement. This requires banks to maintain a stable funding profile with regard to the theoretical liquidity of their exposure over a one-year period (in order to protect their capacity to maintain exposure in the event of a liquidity crisis). The final rule differs from the Basel standard, by allocating a nil stable funding requirement to high-quality liquid assets (such as Treasuries) and short-term loans guaranteed by such assets (reverse repos)**
According to the polls, Democrat Joe Biden is well placed to beat Republican Donald Trump and win the presidential election on 3 November 2020. However, because of the unusual US election process, the result is far from a foregone conclusion. There is also the threat of the result being disputed, and it could be delayed. President Trump’s record, which for the sake of fairness should be assessed up to the start of the pandemic, is mixed. Although GDP, jobs and especially share prices rose rapidly, the deterioration in the public finances was unprecedented in peacetime, while inequality increased. Higher tariffs did little to reduce the trade deficit. Environmental protection went sharply into reverse under Trump
Five months after crashing in March-April, the indicators making up our ‘barometer’ of US economic activity show an incomplete recovery...
Social distancing and lockdown measures implemented to combat the Covid-19 pandemic severely damaged the US economy in Q2 2020, resulting in a record 9.1% decline in GDP. The ensuing recovery is still incomplete and inequitable, as many of Americans still unemployed because of the pandemic are from low-income categories. The health toll is getting worse, and the United States is the country with the highest number of deaths (nearly 200,000 victims to date). President Donald Trump long played down the disease but must now deal with consequences during the run up to the presidential election on 3 November. Although the incumbent president is lagging in the polls, the election’s outcome is still highly uncertain.
Over the past 10 years, fostering inclusive growth has moved higher up the agenda of governments, international institutions and, increasingly, companies. Under Chairman Powell, it has become a key topic for the Federal Reserve through the focus on the heterogeneity of the labour market situation of different socio-economic groups. It has led to the view that pre-emptive tightening based on a declining unemployment rate is unwarranted. On the contrary, it may very well stop people from finding a job. It will be interesting to see whether other central banks and in particular the ECB in the context of its strategy review, will follow in the Fed’s footsteps.
In the USA, as nearly everywhere else, the economy was partially paralysed in the spring of 2020 by protective health measures in response to the Covid-19 pandemic...
The Federal Reserve has changed its longer-run goals. Going forward, monetary policy will focus on the shortfall of employment from its maximum level, rather than on the deviations from this level. More importantly, the central bank will now seek to achieve inflation that averages 2 percent over time. The announcement implies a more accommodative stance because the timing of the first rate hike is now pushed further into the future. It also means that, eventually, the Fed’s reaction function will become more difficult to read: when will average inflation –a concept that remains to be defined- warrant a policy tightening? Such ambiguity would then lead to increased volatility, unless guidance takes an even bigger role.
In spring 2020, partially paralysed by the Covid-19 pandemic, the US economy entered the worst recession since 1946. Global activity contracted by more than 10% in Q2 before picking up slightly since the month of May. The question is how much of the lost ground can be recovered. With the approach of summer, business surveys are improving and the equity markets are rebounding, signalling rather optimistic expectations, possibly excessively so. Bolstered by the Federal Reserve’s liquidity injections, the markets could be underestimating the risk of corporate defaults, especially given their increasingly heavy debt loads. The latest statistics on the propagation of the virus are not good.
This week’s economic barometer for the United States integrates the first statistics for June, which are significantly better. This is notably the case for the Institute of Supply Management’s (ISM) business sentiment indexes, which rose above the 50 threshold for all sectors (retailing, construction and manufacturing) [...]
With 50,000 new cases reported daily – twice as many as at the beginning of June – and the number of hospitalisations on the rise, the Covid-19 pandemic is in the midst of an alarming resurgence in the United States. Granted the number of cases increases with the increase in testing, but this alone is not a sufficient explanation. The government’s response to the crisis is also to blame. In the European Union, where lockdown restrictions and business closures were implemented earlier and more systematically than in the United States, the situation seems to be better under control. Estimates of economic losses must be approached cautiously. The economy is rebounding on both sides of the Atlantic after reporting historically big contractions of about 10% in the second quarter
The exceptional measures taken by the US authorities to bolster the liquidity of companies and markets in response to the Covid-19 crisis have resulted in a significant expansion of bank balance sheets. Since the financial crisis of 2007-2008, regulators have tightened balance sheet constraints significantly. Fearing that leverage requirements could damage banks’ ability to finance the economy and support the smooth functioning of financial markets, these have temporarily been relaxed. However, the Federal Reserve is unlikely to undergo a slimming regime that will scale back bank balance sheets for a number of years (and almost certainly not before the end of the period of relaxation of requirements)
The United States remain the world’s largest economy in nominal GDP terms. Although at the root of the global financial crisis (2008-09), the country has swiftly recovered over the past decade, partly helped by the boom in the shale oil and gas industry. However, it has also lost ground in some other key industrial areas, mainly against China. At the same time, China has become a world leader in the strategic field of information and telecommunication equipment, and therefore a top supplier to US companies. This increased dependency, along with persistent and widening trade deficits, has led to a radical shift in foreign trade policy and a sizeable rise in US tariffs on imports.
As a consequence of the COVID-19 crisis, the US economy fell by 3.4% in 2020. The recession -the deepest since 1946- was nevertheless followed by a swift and strong rebound in 2021, the United-States being among the first countries to be vaccinated as well as to recover from the economic losses caused by the pandemic. In the aftermath of the authorities’ action to limit the consequences of the crisis, public debt and deficits have surged.
