Stocks turn positive after Fed says it will keep stimulus coming for years: June 10, 2020

The current recession is NOT like the Great Depression. Nononononononono.

Sure, unemployment's only comparison is the Great Depression. And businesses across the country are closed. And many people are struggling to buy food. But Federal Reserve Chairman Jerome Powell doesn't see any similarities.

"I don't think that the Great Depression is a good example or likely outcome for a model of what's happening here at all, I really don't," he said. "There are so many fundamental differences."

Powell noted that the government's response to the economic calamity during the coronavirus pandemic has been "so fast and so forceful."

The origin of the disaster was also different: The current recession was essentially man-made: We decided to shut down a healthy economy

But that doesn't mean we're out of the water -- the economy still faces challenges. But it was a much healthier patient when it was brought into the ER.

"The financial system this time was in very good shape, much better capitalized," he said. "That's different that's what was happening around the time the Great Depression started."

The Fed's federal funds rate aims to balance employment and inflation. Ideally, unemployment will be low, and inflation will be at around 2%.

But during the nation's longest-ever expansion, the Fed was never really able to get to that target. Inflation remained stubbornly low, squeezing people's paychecks and purchasing power.

"We were close for the last couple of years, but we never got there," Federal Reserve Chairman Jerome Powell said during a press conference. "I think we have to be humble about our ability to move inflation up."

The Federal Reserve has committed to keeping interest rates at ultra-low levels until the economy is back on its feet.

The "dot plot", which shows the monetary policy expectations of policy makers, doesn't show an interest rate increase until 2022. And even then, most FOMC members expect rates to remain at today's low level.

It's "dot plot" season, which means the Fed breaks out its crystal ball and then tells everyone it doesn't know anything about the future. Happens every time.

This time, Fed policymakers said unemployment is going to fall below 10% by the end of this year and below 6% by 2022. That's encouraging. But it also thinks that, to support employment, it's going to keep rates near zero for two more years.

Everyone jumped on that prediction with headlines (see above and below this post) about the Fed's expectations. But Federal Reserve Chairman Jerome Powell remained cautious about relying too much on the dot plot.

"The path ahead for the economy is highly uncertain and continues to depend to a significant degree on the path of the pandemic," he noted.

However, Powell said the Fed continues to rely on its monetary policy tools and believes it's "well-conditioned to support the economy in this challenging time." So that's good.

The jobless rate fell sharply during May -- but the Federal Reserve isn't expecting unemployment to return to normal levels anytime soon.

Fed officials anticipate the unemployment rate will drop to 9.3% during the fourth quarter, according to a summary of projections released Wednesday.

Although that would mark a major improvement from the current level of 13.3%, it's still nearly as high as the peak of 10% during the Great Recession.

"A full recovery is unlikely to occur until people are confident it's safe to engage in a broad range of activities," Fed chief Jerome Powell said during a press conference.

Even during the fourth quarter of 2021, the Fed expects unemployment to remain elevated at 6.5%. That's nearly twice as high as the Fed had projected in December, before the pandemic erupted.

By the end of 2022, the Fed expects the unemployment rate will fall to 5.5%. But that's still well above the 4.1% that the Fed considers "normal" over the longer run.

Still, Powell stressed that Fed officials see multiple paths ahead for the economy, meaning these projections should be taken with a grain of salt.

Federal Reserve Chairman Jerome Powell acknowledged widespread protests across America, and he pledged support for racial equality.

"I want to acknowledge the tragic event that has, again, put a spotlight on the pain of racial injustice in this country," he said. "The Federal Reserve serves the entire nation. We operate in and are part of many of the communities across the country where Americans are grappling with and expressing themselves on issues of racial equality. I speak for my colleagues throughout the Federal Reserve system when I say there's no place at the Federal Reserve for racism, and there should be no place for it in our society. Everyone deserves the opportunity to participate fully in our society and in our economy."

Powell said those principles guide the Fed's economic policy and commitment to diversity and inclusion in the workplace. The Fed's open market committee has a single person of color. But Powell said the Fed "will take this opportunity to renew our steadfast commitment to these principles."

Federal Reserve Chairman Jerome Powell praised his board of governors for swift action in rescuing markets. That's great for the overall economy, but he acknowledged that's not going to make it easier for normies to get a loan when they're out of work.

That's where lawmakers have to step up.

"Our ongoing purchases have helped to restore orderly market conditions and have fostered more accommodative financial conditions," Powell said. "Many borrowers will benefit from these programs as will the overall economy, but for many others getting a loan that may be difficult to repay is not the answer. In these cases direct fiscal support may be needed."

Powell noted the CARES Act and other legislation help to benefit people and small businesses directly. And he said Congress may have to act further to keep Main Street afloat.

The Federal Reserve said it expects to keep its lead foot on the stimulus pedal for quite some time, keeping rates near zero through 2022. It will also continue to inject billions of dollars into the economy.

Investors liked what they heard. Stocks turned moderately positive this afternoon.

The Dow was up 35 points

The S&P 500 was up 0.3%

The Nasdaq, already at a record, surged 1.3%

The Federal Reserve left interest rates unchanged and committed to maintaining its unprecedented stimulus plan until the economy "has weathered recent events."

The central bank acknowledged the "tremendous human and economic hardship" that the coronavirus pandemic has brought upon people around the world, and it doesn't think the economic difficulties will let up anytime soon. The Fed updated its economic projections for the year, predicting a 6.5% drop in gross domestic product, the broadest measure of the economy, in 2020.

By December, the Fed expects the unemployment rate to fall to 9.3%, down from 13.3% in May.

Read more here.