According to the Federal Reserve, the economy is in danger of hurtling over another cliff. Still, recent economic statistics and market indicators paint a much more hopeful picture – the S&P 500 just hit a new all-time high, gold is falling, and bond yields are rising. Which story are we supposed to believe?
On the one hand, we have the recent economic statistics. On Friday, the Commerce Department reported that retail sales rose another 1.2% in July, pushing them above pre-pandemic levels. If that’s not a classic V-shaped recovery, I don’t know what is. While the headline sales figure came in below expectations of a 2.0% rise, the prior month’s 7.5% increase was revised upward to show an 8.4% jump. Excluding autos, July sales actually beat estimates, rising 1.9% versus a Street forecast of 1.5%.
Also, on Friday, the Fed itself reported that industrial production rose 3.0% last month, in line with estimates. In comparison, the capacity utilization rate rose more than two percentage points from the previous month to 70.6% and its fourth big monthly increase in a row.
The day before, the Labor Department said initial unemployment claims continued to drop, falling well below one million for the first time in several months and down sharply from a peak of near seven million in March, a reverse V-shaped drop.
The financial markets seem to be buying it. Last week the yield on the benchmark 10-year Treasury note rose above 0.70% for the first time since late June, putting it up 20 basis points just in the previous 10 days. Gold is down more than 5% from its August 6 high. And of course, the S&P 500 has wiped out all of this year’s losses, including the 33% drop in February and March, when a good portion of the U.S. was going into lockdown.
Yet, on the other hand, we have a phalanx of Fed officials who are painting a dire picture of a U.S. economy ready to plunge off another cliff if we don’t get the coronavirus under control as quickly as possible, even if that means shutting down the U.S. again, which will surely produce the disaster they’re warning against.
The latest alarm came from Boston Fed President Eric Rosengren, who said last week that failure to control the virus is “not only placing citizens at unnecessary risk of severe illness and possible death but are also likely to prolong the economic downturn.” The same day San Francisco Fed President Mary Daly warned that “we know the coronavirus is not behind us and that we’re in this for a longer period of time than we hoped.” The week before, as I pointed out in my previous column, Minneapolis Fed Neel Kashkari basically lobbied for another shutdown as a means to contain the virus.
Of course, they’re sounding the same notes as the Fed chair himself, Jerome Powell. However, lately, their comments have gotten more strident, even as more reports coming in show a sharp rebound in economic activity despite signs that the virus is escalating in some areas of the country.
It’s one thing to be worried about the ongoing spread of the virus – a perfectly legitimate concern – but what economic statistics is the Fed looking at?
Over the past few years, I’ve pointed out the many instances in which the Fed has been blindsided by economic statistics you would think it should have known about, making monetary policy decisions at odds with reports that came in just a few days later. The economy has been gaining enormous traction for the past few months, yet the Fed still sounds like we’re back in March or headed that way.
Does the Fed know something that it’s not telling us? Are things so bad under the surface that the economic statistics aren’t showing? Have investors been duped?
Or is this just a big power grab by the Fed? Is the Fed deliberately trying to talk down the economy so as to further increase its already outsize role in the economy and the financial markets, whether it’s justified or not?
If you haven’t been keeping score lately, the Fed’s massive balance sheet recently dipped below $7 trillion. Is that dip getting the Fed worried that its role is being diminished? It would be outrageous if the Fed were deliberately lowering expectations solely to protect and enhance its own turf. Let’s hope that’s not the case.
Then again, there’s reason to be optimistic about the Fed’s pessimism – it basically ensures that the Fed will continue to ease monetary policy and plow money into the markets, which will boost asset prices.
“Who ya gonna believe, me or your own eyes?” – Chico Marx
George Yacik
INO.com Contributor – Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
