What the experts think the fed will do next
The global pandemic has impacted every aspect of life, everywhere, and that has many people worried about the impact COVID-19 will have on the economy. With all eyes on the market, many are wondering what the Federal Reserve will do next and how any changes will affect construction.
In previous recessions, the Fed cut interest rates by over five percentage points. So, in a recession that sees the unemployment rate at its highest level since the Great Depression, some investors expect the Fed to cut interest rates by more than five points. This has led experts to speculate that Federal Reserve Chairman Jerome Powell could drop interest rates below zero, for the first time ever.
These economists believe that lowering interest rates below zero will stimulate demand for credit, which helps stimulate the economy. In theory, this type of action can set off a virtuous economic cycle in which people use credit to produce more goods and services.
Standard Chartered, a British multinational banking and financial services company, issued a statement last month saying that dropping the interest rate below zero, to 0.5% or -1%, would be what that bank called a “Hail Mary” move, but that such a move might be prudent if the US economy doesn’t recover quickly from the pandemic.
Goldman Sachs likewise issued a statement last month saying that a deep and prolonged recession would merit negative interest rates, warning that asset purchases and forward guidance from the Fed probably would not be enough to stabilize the markets.
“Lowering interest rates eases financial conditions, boosts demand, and reduces debt burdens, helping the economy return to full employment more quickly,” the statement said.
So far, Powell has not publicly entertained the idea of negative interest rates, but most experts speculate that Powell’s next move will hinge on how quickly and fully the U.S. markets recover from the economic crisis.
There are reasons for optimism, including successful economic reopenings in Asia and Europe.
David Mericle, an economist at Goldman Sachs, said he expects the Fed to clarify forward guidance, predicting that the Fed could say it won’t increase interest rates until the economy reaches full employment and 2% inflation.
“Waiting to make sure that inflation reaches 2% before raising interest rates would seem roughly consistent with what Fed officials appear to mean by average inflation targeting — aiming for a range of 2-2.5% inflation during the expansion phase of the cycle, while stopping short of a full make-up strategy,” Mericle said.
Whatever step Powell chooses to take next will, no doubt, be watched closely by investors. With history as a guide, it seems likely that the Fed will choose to lower rates allowing construction to continue to prosper, but it remains to be seen exactly how low or for how long.
