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Pioneering Fed Keeps Market Simmering as Ravages of Virus Take Toll

Another 6 million unemployment claims should have been a market mover, but by closing bell investors regarded it as stale news.

MANHATTAN (CN) — Another 6 million unemployment claims should have been a market mover, but by closing bell investors regarded it as stale news.

Instead, Wall Street focused keenly on additional steps taken by the Federal Reserve to bolster mid-sized companies, as well as a reported deal between Russia and Saudi Arabia to cut oil production.

Ericka Harris, right, and her daughter Jordan, wear their protective masks as they walk back home after getting a lunch and homework from the child’s school on Chicago’s Southside Tuesday, April 7, 2020, in Chicago. Black residents in Chicago accounted for 72% of deaths from COVID-19 complications and 52% of positive tests for the coronavirus, despite making up only 30% of the city's population, according to the city's public health agency. (AP Photo/Charles Rex Arbogast)

The Dow Jones Industrial Average opened to gains Thursday morning, largely ignoring an additional 6.6 million in unemployment claims that were eclipsed by the Fed’s new $2.3 trillion lending program.

Even though more than 16 million Americans are now newly unemployed, the Fed’s moves have provided a cooling balm for overheated investors who had expected high unemployment, even if analysts underestimated the final number.

“Unexpected news moves the market,” said Michael Pagano, a finance professor at Villanova University. “If investors expected 5 million unemployed and they got 6 million, that’s no big deal for them.” 

By the closing bell Thursday, the Dow hit 23,719 points, while the S&P 500 increased by 1.45%, one of that market’s best weeks since before the Great Recession. 

Markets also were calmed by remarks by Fed Chairman Jerome Powell about the possibility of a strong, albeit gradual, recovery.

“There is every reason to believe the economic rebound, when it comes, will be robust,” Powell said in remarks Thursday morning during a Brookings Institute webcast. 

Powell warned, however, the second quarter of 2020 is likely going to be “a very weak one,” and that the second half of the year depends on Americans’ adherence to social-distancing guidelines. 

To avoid “a false start” that then leads to another downturn, however, the chairman also emphasized the importance of having a serious discussion on how to reopen the economy.

“I would give the Fed a really good grade so far because they have the playbook, and they are using it,” Pagano said. “The fiscal stimulus is happening quicker and being better directed” than it was during the Great Recession, he noted, due to what the Fed has learned from that experience.

The real problem is whether the Fed calls it quits. “You don’t want to become like Greece,” where overall debt was allowed to overwhelm the country’s gross national product, Pagano said. “There is almost $4 trillion now sitting out there.”

The Fed has taken a number of groundbreaking steps the last few weeks, including slashing interest rates nearly to zero and opening up an unlimited funding mechanism for ailing businesses. 

And the central bank shows no signs of stopping. “We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” Powell said Thursday.

Powell added that the Fed has additional powers to help ailing business sectors and continue to ease lending. “There is no limit on how much of that we can do,” he said. 

Lamont Black, a finance professor at DePaul University and former economist for the Federal Reserve, agrees the Fed can do more.

For instance, the central bank could magnify their existing programs, reduce the interest rate on their loans to boost demand, and further expand their balance sheet without really worrying about inflation, Black said.

“The main risks of additional liquidity is always inflation … and we haven’t seen much of that,” he said. “If that’s not a risk, there is no clear constraint on the Fed except a political one.”

The Fed has been driven, in part, by fears of a doomsday scenario in which the U.S. economy doesn’t recover until 2021.

During the March 15 meeting of the central bank’s open markets committee, the Fed considered a doomsday scenario of no economic recovery until next year.

“In one scenario, economic activity started to rebound in the second half of this year,” according to the central bank’s open markets committee meeting on March 15. “In a more adverse scenario, the economy entered recession this year, with a recovery much slower to take hold and not materially under way until next year.”

Markets were bolstered also by news of a possible truce in the Saudi-Russia oil-price war. According to reports, members of OPEC had tentatively agreed to cut output by up to 12 million barrels per day, with daily reductions of additional 5 million barrels by non-OPEC members.

As of press time, the production cut was not a done deal and reports indicated some countries, such as nonmember Mexico, threatened to upend the agreement. 

Oil prices, originally up double digits after news of a potential deal broke, eventually dropped, with the Brent hitting $31 per barrel and the West Texas Intermediate hitting just under $23 per barrel, but equities remained in the black.

Investors have kept a close eye on the oil price war, but many experts say prices won’t come back up until demand does, which is almost entirely contingent on an end to social distancing.

Dr. Anthony Fauci, an immunologist who has been director of the National Institute of Allergy and Infectious Diseases since 1984, has scaled back his original prediction of 100,000 to 200,000 dead in the United States to about 60,000, which also likely encouraged investors. 

More than 1.5 million people have been confirmed to have Covid-19, and about 93,000 have died worldwide, according to data compiled by Johns Hopkins University. More than 451,000 have been infected by the virus in the United States, while almost 16,000 have died.

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