People are taking to the streets and the North American economy is in shambles, but you wouldn’t know it by looking at U.S. markets.
Until now, action by the Federal Reserve Board has been wonderful for the richest 10 per cent of U.S. citizens who, according to the central bank’s own data, own 90 per cent of all stocks.
By cutting interest rates to near zero and promising a flood of new money into the economy through quantitative easing, Fed Chair Jerome Powell has U.S. market traders convinced it’s time for renewed exuberance.
The Dow Jones Industrial Average paused in its rise yesterday, but U.S. President Donald Trump seemed thrilled when the Nasdaq market soared to new highs.
Market record as economy slumps
“NASDAQ HITS ALL-TIME HIGH,” crowed Trump in a tweet. “Tremendous progress being made.”
NASDAQ HITS ALL-TIME HIGH. Tremendous progress being made, way ahead of schedule. USA!
But on main street, where businesses are failing, where unemployment has hit double digits, where coronavirus deaths keep climbing and anti-Black racism protesters fill city centres, progress is considerably less obvious. Records are headed in the other direction.
It is well-known that financial markets are not necessarily a good short-term indicator for the wider economy. But as the central bank head made very clear at Wednesday’s news conference, the suffering is far from over for Black and Hispanic low-wage earners.
Just as the Organisation for Economic Co-operation and Development — sometimes described as the rich countries’ economic think-tank — was predicting the worst recession in a century, Powell announced the bank would hold interest rates below 0.25 per cent.
And the consensus view from members of the Federal Open Markets Committee, which advises the Fed chair, was that the central bank was unlikely to hike those rates again until 2022.
It was a point that Powell made emphatically at yesterday’s news conference to an online assembly of reporters.
Not even thinking about it
“We’re not thinking about raising rates,” he said. “We’re not even thinking about thinking about raising rates.”
Asked twice about how he could justify the fact that those continued low interest rates contribute to the soaring wealth of the richest while the poor are thrown out of work, Powell was unwilling to pass judgment.
And asked directly whether there was some way to tweak the system to prevent a widening of the wealth gap, a repeat of what happened following the 2008 economic meltdown, the Fed chair was unable to offer suggestions.
Not only that but one reporter observed that since the Fed intervened with its rate reductions on March 23, every stock in the S&P 500 index had risen in value despite a sharply weakened economy. The reporter asked whether the Fed was worried it had created a market bubble that could pop.
Powell sidestepped the questions, offering instead the same justification as central bankers offered in 2008. Saving the financial system was the first essential step in saving the entire economy, he said, and that required stopping the panic once investors realized the COVID-19 disease would sweep the world.
“From that point forward, investors everywhere in the world, for a period of weeks, wanted to sell everything that wasn’t cash,” Powell said. “So what happened was, markets stopped working.”
Just as in 2008, said Powell, the Fed and others, including the Bank of Canada, had to flood the market with cash as the only way to “restore the markets to function.” And while it is not the Fed’s job to decide asset price levels, he said, he was pleased markets are now functioning once again.
Struggles on main street
Also just as happened 12 years ago, getting the real main street economy working again is a harder task. While sending money to financial markets was quick, getting loans to struggling small businesses has been much more difficult. But eventually low rates should help there too, he said.
“There’s no playbook here,” Powell said. “If we’d had a great idea for changing main street, we would have done it.”
The Fed chair was visibly dismayed by the economic setback, when only months ago, unemployment was at record lows reaching a point where he could see wages starting to rise and even people who had left the workforce were being drawn back in.
Now, he fears it will be two years or more before the economy can begin to replace those lost jobs. Millions will likely never get their jobs back, and most heart breaking, he said, was that the worst suffering has been in low-wage service jobs often held by the least well off.
“Unemployment has gone up more for Hispanics, more for African Americans, and women have borne an extraordinary, a notable, share of the burden,” said Powell.
And while the head of the Federal Reserve said he would use every tool in the central bank’s toolbox to get people back to work, Powell was frank about the things he could not do.
Fiscal spending, tax policy and wealth redistribution are tools that remain firmly in the hands of elected officials should they decide to use them.
Follow Don on Twitter @don_pittis