Fed seen holding rates at zero for five years in new policy
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Fed Chairman Jerome Powell is slated to provide an update on the Fed’s 1-1/2-year-old framework review of its policies and practices when he speaks on Thursday to the central bank’s Jackson Hole conference
Synopsis
The new approach, which could be unveiled as soon as next month, is likely to result in policy makers taking a more relaxed view toward inflation, even to the point of welcoming a modest, temporary rise above their 2% target to make up for past sh...
The Federal Reserve looks likely to keep short-term interest rates near zero for five years or possibly more after it adopts a new strategy for carrying out monetary policy.
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The new approach, which could be unveiled as soon as next month, is likely to result in policy makers taking a more relaxed view toward inflation, even to the point of welcoming a modest, temporary rise above their 2% target to make up for past shortfalls.
Fed Chairman Jerome Powell is slated to provide an update on the Fed’s 1-1/2-year-old framework review of its policies and practices when he speaks on Thursday to the central bank’s Jackson Hole conference, being held virtually this year because of the coronavirus pandemic.
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“I wouldn’t be surprised if interest rates are still zero five years from now,” said Jason Furman, a former chief White House economist and now Harvard University professor.
That would be good news for some investors. Thanks in no small part to the Fed’s ultra-accommodative monetary policy, the S&P 500 stock-market index is trading at a record high even though the US economy has yet to recover much of the ground it lost in the deepest downturn since the Great Depression as the pandemic took hold.
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FOMC Forecasts At their June meeting, all 17 Fed policy makers projected that the federal funds rate they target would remain near zero this year and next. And all but two saw rates staying at that level in 2022. Officials will provide updated quarterly forecasts at their meeting next month, including for the first time projections for 2023.
“We’re not even thinking about thinking about raising rates,” Powell told reporters following the June meeting, in a memorable maxim that he’s repeated since.
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Eurodollar futures aren’t currently pricing any premium for Fed rate hikes until early 2023, with a full quarter-point increase priced in toward the end of 2023. Some traders, though, have viewed this as slightly too dovish, with demand emerging for hedges against a steeper path than is currently priced in for 2023 and 2024. Some see ultra-easy monetary policy eventually spurring inflation.
In a sign of economic resilience, government data on Wednesday showed US orders for durable goods rose in July by more than double estimates amid a continued surge in automobile demand, indicating factories will help support the rebound in coming months.
The Fed held rates near zero for seven years during and after the financial crisis before raising them in December 2015. Former Fed Vice Chairman Alan Blinder doubts it will be that long this time, though he adds that he would have said the same thing when the Fed first cut rates effectively to zero in December 2008.
“It’s perfectly conceivable it could take seven years” before rates are increased, given how difficult it’s been for the Fed to generate faster inflation, said former US central bank official Roberto Perli, who is now a partner at Cornerstone Macro LLC.
In the last decade, it took more than three years for inflation-adjusted gross domestic product to rise back to the level that prevailed before the 2007-09 financial crisis. The recovery is expected to be faster this time: Deutsche Bank global head of economic research Peter Hooper sees GDP attaining its first-quarter level in the first half of 2022, though much will depend on the development and dissemination of a vaccine.
Framework Review But staying the Fed’s hand will be a change in how it reacts to developments in the economy as a result of the framework review.
When it raised interest rates in December 2015, core inflation was clocked at 1.5% -- it’s since been revised lower -- while unemployment stood at 5%.
Economists said it’s hard to see the Fed increasing rates under similar conditions now.
The Fed first pronounced a 2% target for inflation in 2012, and officials took that to mean they would always shoot for 2%, no matter how much or for how long they missed. Bygones, they said, would be bygones. The trouble was that inflation has consistently run below their objective since then.
Under the new regime, the Fed is expected to seek an inflation rate that roughly averages 2% over time. So a modest rise in inflation above target would be welcomed, not feared, after an extended period where it undershot.
The Fed is also expected to codify a change in its approach toward achieving full employment. In the past, officials shied away from pushing joblessness below what was considered its long-run natural rate out of concern that would lead to too rapid inflation.
Now, the emphasis is on the benefits of a strong labor market for the economy and society. “They’re not going to act to cool off the labor market unless it’s generating unwanted inflation,” said Nomura Chief US Economist Lewis Alexander. “That’s essentially walking away from the concept that there is a natural rate that it is irresponsible to push beyond.”
What Bloomberg’s Economists Say... “The current inflation targeting approach is far from perfect, but alternatives also have flaws, including communication challenges, reduced policy flexibility, concerns about Fed credibility and technical impediments.” -- Yelena Shulyatyeva
Powell has said he’d like to see the jobs market return to its pre-Covid-19 state, when unemployment stood at a half-century low of 3.5%. It’s now 10.2%.
Blinder said it will take years to do that. “I hope it won’t be decades,” the Princeton University professor added.
The bottom line for policy: a prolonged period of rock-bottom interest rates.
“I’d be very surprised if it’s less than three years,” said David Wilcox, a former Fed official now with the Peterson Institute for International Economics. “I could see it being as much as six or seven years if the damage from the crisis proves to be much more long lasting.”
Goldman Sachs says the S&P 500 could climb another 7% from current levels if a 'more optimistic US GDP forecast' plays out
Saloni Sardana
Aug. 14, 2020, 08:15 AM
Ramin Talaie/Corbis/Getty Images
Goldman Sachs said in a note on Thursday that the S&P 500 could hit 3,600 if markets price in the bank's "comparatively more optimistic US GDP forecast."
The bank's strategists Dominic Wilson and Vickie Chang said that if the economy contracted by only 5% in 2020 and grew by 6.2% next year, then real yields would rise sharply to levels of cyclical optimism in June.
The US bank said in a note last week that banks were underpricing a scenario that a vaccine will be developed by the end of the year and widely distributed by the first quarter of 2021.
The S&P 500 could hit 3,600 if markets price in a "comparatively more optimistic US GDP forecast," Goldman Sachs said this week. That's almost 7% above where the index traded on Friday.
In a note published Thursday, the strategists Dominic Wilson and Vickie Chang said that if the consensus forecast moved to its forecast of a 5% contraction in 2020 and 6.2% growth next year, then real yields would rise sharply back to levels that prevailed at the peak of cyclical optimism in June.
The bank said it used a US growth factor that saw a sharp upgrade during the early stages of reopening but "reversed that earlier upgrade" as more COVID-19 outbreaks hit the country.
"Our US growth factor essentially stabilized at lower levels in late June, around the time that the worst-affected US states implemented more serious measures to control the virus spread," the bank said. "Over the last two weeks, our US growth factor has picked up quite sharply again and is now back around the highs that prevailed at the start of June."
"Recently, there has been some improvement in US case growth news, and US data have been a little better than original expectations of softer growth after the partial reversals in reopening in parts of the country," Goldman Sachs said.
It added: "But we think the shifts in growth pricing also likely reflect increased optimism about prospects for an early vaccine. Our own US growth forecasts, which were upgraded earlier this week, now incorporate a vaccine approval by the end of 2020, and widespread distribution by the end of 2021 Q2 as the central case."
The S&P 500 closed at 3,380.35 on Thursday, a whisker away from Wednesday's all-time-high close. It's up about 51% since touching 3-1/2-year lows of 2,237.40 in March amid the market turmoil over the coronavirus crisis.
The index's explosive upward correction has been attributed to investors assessing the type of economic recovery in a post-COVID-19 world. They also remained quite sensitive to news about vaccine progress and to central banks' rollout of different stimulus packages to help companies and businesses survive the crisis.
Goldman Sachs' most recent S&P 500 prediction is in line with those of other renowned market strategists.
The market bull Ed Yardeni said this week that unprecedented stimulus and stocks' bullish trend would drive stocks up another 5% by the end of this year and another 14% by the end of 2021.
The veteran market-watcher has turned optimistic about the stock market again after telling Business Insider that stocks could fall 15% to 20% if tensions between the US and China persist and the US economy does not recover before 2022.
Moody’s downgrades SBI standalone profile, expects asset quality to worsen
The rating agency has, however, affirmed SBI's long term and foreign currency deposit ratings at Baa
Service has downgraded State Bank of India's standalone profile to ba2 from ba1 saying it sees SBI's asset quality and profitability deteriorating.
The rating agency, however, affirmed SBI's long term local and foreign currency deposit ratings at Baa3, the same level as India's sovereign rating.
"The downgrade of SBI's BCA to ba2 from ba1 reflects Moody's view that the bank's asset quality and profitability will deteriorate. The resultant weakening in the internal capital generation will reverse improvements in the bank's financial metrics achieved over the past two years," Moody's said in a report.
SBI's ba2 BCA takes into account the bank's strong funding and liquidity a result of its dominant market position, and its important links to government transaction-related businesses which support its stable funding franchise. As of the end of March 2020, SBI's liquidity coverage ratio (LCR) was healthy at 134 percent, as per the report.
Bearish sentiment stayed above 40% for the 22nd time out of the past 24 weeks. Plus, this week’s special question asked AAII members what impact the impasse over a new coronavirus relief bill is having on their outlook for stocks.
August 20, 2020
Pessimism among individual investors about the short-term direction of the stock market extended its streak of staying above 40%. The latest AAII Sentiment Survey also shows modestly higher levels of bullish sentiment and a small decline in neutral sentiment.
Bullish sentiment, expectations that stock prices will rise over the next six months, rose 0.4 percentage points to 30.4%. Though at a five-week high, optimism remains below its historical average of 38.0% for the 24th consecutive week and the 29th week this year.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 0.6 percentage points to 27.2%. This is the 30th time out of 32 weeks that neutral sentiment is below its historical average of 31.5%.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 0.3 percentage points to 42.4%. Pessimism is above its historical average of 30.5% for the 26th consecutive week and the 28th time this year.
Pessimism is above 40% for the 22nd time out of the past 24 weeks. Bearish sentiment readings above 40.2% are unusually high (more than one standard deviation above average). Both bullish and neutral sentiment are within their typical historical ranges.
The ongoing high level of pessimism reflects concerns about the coronavirus pandemic and the economy. However, some AAII members have been encouraged by the rebound in the stock market from its March lows. Other factors influencing AAII members’ sentiment include the economy, corporate earnings, valuations, the November elections and interest rates.
This week’s special question asked AAII members what impact the impasse over a new coronavirus relief bill is having on their outlook for stocks. One out of three respondents (33%) say that the impasse over a new coronavirus relief bill is having little to no impact on their outlook for stocks. This compares to 22% of respondents who say that the impasse is having a negative impact on their outlook for stocks. An additional 14% of respondents say that they are more concerned about the impact of the upcoming election on the market.
Other factors listed as affecting individual investors’ outlook include market volatility (named by 13% of respondents), the long-term impact of debt (named by 8% of respondents) and the possibility of another market correction (named by 7% of respondents).
Here is a sampling of the responses:
“The continued impasse and possible lack of agreement before the election will cause me to significantly reduce my holdings. I expect (as has often been historically the case) a substantial sell-off in October.
“I don’t believe that the impasse has any effect on the market. Investors should be aware by now that the government is dysfunctional.”
“Little impact. Of more concern to me is there being a coherent federal leadership in addressing the pandemic, the disconnect between the haves and have less and addressing economic and ‘people’ effects of the pandemic.”
“In the short term, I expect major indexes to react negatively. Once additional stimulus is in place and there is further definition on dealing with the coronavirus, upward movement will reoccur into next spring, regardless of which party wins in November.”
Levkovich raises year-end price to 3,300 on sustained Fed help
Stocks continue to power to all-time highs on reopening hopes
Tobias LevkovichPhotographer: Chris Goodney/Bloomberg
One of Wall Street’s most bearish strategists has had a reality check.
Citigroup Inc.’s Tobias Levkovich has raised his year-end target for the S&P 500 index to 3,300 from 2,900 thanks to the impact of “unbridled” Federal Reserve easing, negative real rates and the breach of technical resistance levels. That moves his index outlook from joint-second-last place to just above the median target of 3,200 among strategists surveyed by Bloomberg.
It is Levkovich’s second bump up in target for the U.S. equity benchmark in as many months, though still points to downside as the index closed at 3,431 on Monday. Futures rose 0.4% as of 7:46 a.m. in New York. Citi’s chief U.S. equity strategist joins peers at Goldman Sachs Group Inc. and RBC Capital Markets, who’ve upped their forecasts in recent months.
“The pushback to our upward adjustments will involve claims of capitulation and a lack of fortitude/consistency,” Levkovich wrote in an Aug. 24 note. “However, we appear to be in one of those periods where technicals seem to overwhelm fundamentals and standing in the way of that might only indicate our intransigence.”
While Levkovich said he worried that investors have become overly complacent, ignoring many issues that would have been disruptive in the past -- and that valuations have become unattractive -- he acknowledged that earnings have been better than expected and progress on the health crisis will be welcomed.
“We still think the market may be ahead of itself but the Fed will do ‘whatever it takes’ to prevent U.S. stocks declining by teen-like percentages,” the strategist wrote. “Is the S&P 500 ready to drop 500 points? No.”
Salesforce join blue-chip gauge, while ExxonMobil departs
U.S. stocks were under pressure Tuesday morning, failing to retain a grip on opening gains, after a report on consumer confidence highlighted a division in the perception of the economy on Main Street compared with Wall Street where equities have recovered to new record highs recently.
What are major benchmarks doing?
The Dow Jones Industrial Average DJIAfell 129 points, or 0.5%, to around 28,178, while S&P 500 index SPXES00lost 2 points, or 0.1%, at about 3,430, after briefly hitting an intraday all-time high at 3,439.16. The Nasdaq Composite Index COMPwas down 18 points, or 0.2%, at roughly 11,361, at last check.
The Dow on Monday rose 378.13 points, or 1.4%, to finish at 28,308.46, leaving it 4.1% away from its record close set on Feb. 12. The S&P 500pushed further into uncharted territory, rising 34.12 points, or 1%, to close at a record 3,431.28. The Nasdaq Composite also ended at a record, rising 67.92 points, or 0.6% to 11,379.72.
What’s driving the market?
Investors were heartened overnight by news that U.S. and Chinese officials reaffirmed their commitment to a trade deal signed in January, but questions about the power of investors to help the economy mount a more substantial recovery from COVID-19 were thrown into some doubt after a reading on U.S. consumer confidence.
Consumer confidence fell in August to a new pandemic low after a fresh rash of coronavirus cases during the summer. The index of consumer confidence sank to 84.8 this month from a revised 91.7 in July, the Conference Board said Tuesday. Economists polled by MarketWatch had expected a reading of 93.0.
Analysts tied the early positive tone across global equity markets in part to remarks following a phone call between U.S. and Chinese officials over the status of the partial trade agreement despite rising tensions over Beijing’s treatment of Hong Kong and other issues.
China described the call as a “constructive” discussion between Vice Premier Liu He, the country’s top negotiator, and U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. The U.S. said both sides “see progress and are committed to taking the steps necessary to ensure the success of the agreement.” The call came after plans for a discussion earlier this month were postponed.
“Given the exchanges between the two countries recently have been negative, any small bit of positivity is seen as a big step forward, even when it isn’t,” said David Madden, analyst at CMC Markets, in a note. “The Chinese government are still well behind on their commitments to purchase US goods, but to be fair, some of that is down to the pandemic.”
In other U.S. economic data, U.S. home prices continued to rise at a steady clip in June as many states began reopening businesses from shutdowns related to the coronavirus pandemic. The S&P CoreLogic Case-Shiller 20-city price index posted a 3.5% year-over-year gain in June, down from 3.% the previous month. On a monthly basis, the index increased 0.2% between May and June.
Sales of new single-family houses rose 14% between June and July to a seasonally-adjusted annual rate of 901,000, the U.S. Census Bureau reported Tuesday. The pace of sales was the highest since 2006. Compared with a year ago, new home sales were up 36%.
Stocks are set for an upbeat start to the week and recent highfliers are set to take the lead again. Our call of the day comes from a Wall Street analyst who has just gotten a lot more bullish on his best-case scenario for one of those stocks — Tesla.
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