Back in Black With Assurances From Fed on Interest Rates

Helping send markets back into the black, the Fed returned Wednesday with dovish comments on liquidity and interest rates.

Visitors arrive at Universal Studios in Orlando, Fla., on June 3 after the theme park reopened for season-pass holders. (AP Photo/John Raoux)

MANHATTAN (CN) — U.S. markets crept back up from Tuesday’s down day with the Federal Reserve announcing it would not change interest rates.

The Dow Jones Industrial Average gained 162 points for the day, a 0.6% increase, while the S&P 500 and Nasdaq did even better, gaining 1.2% and 1.3%, respectively. Gold also hit a new high of $1,959 per ounce by the closing bell. 

A day after Republicans released their $1 trillion stimulus proposal to little enthusiasm, the Fed stepped in again as an adrenaline shot for Wall Street.

As expected, the Federal Reserve kept the federal funds rate at 0% to 0.25% and said it would keep rates at that level until the “economy has weathered recent events and is on track to achieve its maximum employment and price stability goals,” according to a Federal Open Market Committee’s statement that included mostly the same boilerplate language from the committee’s last few statements.

Following the statement, Chairman Jerome Powell said in a press conference markets should expect the Fed’s expansive lending facilities and low interest rates to be fixtures for a long time.

“We think that the economy will need highly accommodative monetary policy and the use of our tools for an extensive period,” Powell said. “We’re in this until we’re well through it.”

Powell said the Fed would continue to purchase treasuries and municipal bonds “at least at the current pace” through the rest of the year, noting that the central bank hasn’t done much lending because “markets started working again … so we didn’t turn out to need the kind of funding that we thought we would.”

Screenshot of Federal Reserve chairman Jerome Powell in comments after a July 29 announcement.

Predicting that the GDP contraction expected Thursday will likely be the largest on record, Powell said to expect a “long tail” period in which many sectors remain ravaged by unemployment, though much depends on the path of the virus. 

“I think we feel that it might be the most central fact, or the most central driver of the path of the economy right now, is the virus,” Powell said, sidestepping a question about whether he thought parts of the country reopened too quickly. 

Powell was less reticent about talking about Congress’ role in providing further stimulus for the economy, and he noted unemployment is likely to remain fairly high.

“Lending policy is a particular tool, and we’re using it very aggressively, but fiscal policy is essential here,” he said, pointing to the Paycheck Protection Program’s grants that the Fed legally could not provide. “You can save a lot of businesses and a lot of jobs with those.”

Against the larger backdrop of monetary policy, corporate earnings have continued to roll in, highlighting the individual scars several industries have suffered.

In its earnings release, General Motors reported a 53% drop in net revenue last quarter compared with the second quarter of 2019. The automaker lost $806 million last quarter, and is down a whopping $11.6 billion in cash flow year over year. While GM has not offered forward-looking financial guidance, it noted in its release that it plans to focus on electric cars, including three models to be revealed later this year. 

In the aerospace industry, Boeing also saw a drop in revenue, from $15.7 billion in Q2 2019 to $11.8 billion last quarter, and has announced plans to slash its production. The company’s biggest hit came from its commercial airplanes division, which suffered a 65% decrease year over year in revenue, but its other divisions also saw double-digit percentage declines.

Six Flags Entertainment predictably showed park revenue from admissions and concessions dropping precipitously, from $477 million in Q2 2019 to just $19 million last quarter. As of July 25, the company had opened 18 of its parks, though some only partially.

“Now more than ever, we believe our guests need opportunities for outdoor entertainment, and I am pleased that city and state officials have acknowledged our safety standards as a best-in-class example of how businesses can safely serve guests during this pandemic,” said CEO Mike Spanos in a statement.

A number of tech leaders — including Apple, Amazon, Facebook, and Google’s parent company — will be reporting their quarterly results Thursday. Tech stocks had been doing gangbusters but have tempered in recent weeks as markets have cooled. 

Meanwhile, some analysts are noting the improvement in Covid-19 cases in hard-hit states such as Arizona, Texas and Florida. “The U.S. may be at the start of a sustained trajectory of virus spread,” economists at Goldman Sachs wrote in an investor’s note. They warned, however, that “the degrees of reopening and consumer activity may still increase slowly until case levels are significantly lower.”

Health experts remain wary. During an interview Tuesday morning on ABC’s “Good Morning America,” White House infectious disease adviser Dr. Anthony Fauci said some Midwest states are showing early signs of a renewed outbreak.

Fauci said the number of tests out of Ohio, Indiana, Kentucky and Tennessee show an early indication of cases increasing. “That’s a sure-fire sign that you got to really be careful,” he said. “We just can’t afford yet again another surge.”

According to data compiled by Johns Hopkins University, more than 16.8 million people have been infected by Covid-19 worldwide, while 662,000 have died. More than 4.3 million Americans have contracted coronavirus, while nearly 150,000 U.S. deaths have been attributed to the virus.

%d bloggers like this: