Pennsylvania Trust

Fed’s Move Highlights Risks To Economy

Fed’s Move Highlights Risks To Economy

As we all acknowledge, the coronavirus (COVID-19) has globally altered normal activities of all individuals and businesses. At this point, the crisis in the U.S. is expected to accelerate in the coming weeks, as the number of positive tests will likely increase exponentially. As a result, it is important to recognize that this pandemic is very different from prior economic shocks. 2008 was primarily centered around the financial industry and housing. The 2001 dot-com recession was due to an asset price bubble, and the oil embargo of 1973 was a geopolitical event.

Another factor that makes this unique is that the global economy was in an upswing at the time of the outbreak, and the U.S. specifically was experiencing its lowest unemployment in 50 years at the same time net worth was at an all-time high. Both should bode well for the economy’s ability to bounce back from what will be a dramatic decline in economic activity.

We now expect that this will generate an immediate contraction of economic activity, including consumption, production, and business investment spending, as well as a decline in employment. The ultimate scope of the drawdown will be determined in large part by the intensity and duration of the virus. We believe the shape of the recovery will depend on household and business confidence, among other factors. Our expectation is that some economic activities will be slow to recover, such that the overall rebound may not be as strong as the magnitude of the decline.

We applaud the Fed’s recent action. They have acted aggressively in lowering rates to 0.00-0.25%. Further, they are re-engaging in large-scale asset purchases ($700 billion) and other credit easing and liquidity provisions to ensure the banking industry continues to operate without major disruption. These actions reflect the committee’s concerns that the health crisis has the potential to become a financial crisis that would magnify the economic effect. Ultimately, while these measures may not be able to prevent a recession, they will aid in the eventual economic recovery.

In the subsequent news conference, Chairman Powell acknowledged that the crisis will need to be addressed with a combination of fiscal and monetary measures to help lessen the effect while supporting the health policies as they are introduced. In light of their emergency meeting today, the Fed canceled the regular meeting, which had been scheduled for March 19th.

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Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.