Snapshot

Fed signals loose policy will persist after lockdowns are lifted

News that the economy had contracted by 4.8% in the first quarter was not sufficient to move the US Federal Reserve (Fed) toward greater policy action. The central bank had already put in place the largest monetary stimulus since the Global Financial Crisis by cutting interest rates and expanding its asset purchase programme, and saw little need to add further fuel.

Nonetheless, the GDP figures were shocking and will be even worse in the current quarter as the full impact of the lockdowns is felt by the US economy. We anticipate a further fall in GDP in Q2 of 22% quarter-on-quarter (not annualised) as the lockdowns extend into May.

The worst is to come, but markets and the Fed already know that. The debate will shift to the shape of the recovery as lockdowns are lifted. We discussed the risks of a weaker-than-expected bounce back in the economy here.

It was notable that Fed chair Jerome Powell said that he expects the reopening of the economy to boost consumer spending, but not to prior levels. He added that the Fed has concerns over longer run effects from the pandemic, or “scarring”, on economic activity. Clearly policy is set to remain loose after the lockdowns are lifted and well into 2021.