Real yields rose as stocks slumped after Federal Reserve Chairman Jerome Powell and other Fed officials warned monetary policy could not get the U.S. economy out of what the president said. the Cleveland Fed called it a “deep hole.”
Don’t look at us, Fed officials said in so many words. The US economy needs more fiscal stimulus from Congress. But Congress is deadlocked on a new spending bill ahead of the November election.
The inflation-protected 10-year Treasury yield rose 2.4 basis points, while the S&P 500 fell 2.37% and the NASDAQ lost 3.02%, leading to the S&P is a hair’s breadth away from a correction and pushed tech stocks well into a correction.
Gold fell $ 38 and the dollar rose. Investors have liquidated assets – stocks, bonds, currencies and commodities – in favor of liquidity, rather than seeking refuge in traditional hedges such as inflation-linked bonds.
With short-term rates close to zero, and set to stay close to zero for the indefinite future, the Fed faces a dilemma.
It can no longer ease monetary policy without bringing rates into negative territory, as the European Central Bank has been doing for years. Negative rates have hardly succeeded in reviving economic activity abroad and creating all kinds of perverse effects.
The market is not convinced that the Fed will cross the zero line, which means that monetary policy may not come to the rescue of the market.
Boston Federal Reserve Chairman Eric Rosengren was the darkest Federal Reserve official to deliver remarks today.
“Recent economic data has been encouraging, but I believe the hardest part of the recovery is still ahead of us,” Rosengren said. “A structural shock, such as the pandemic, can lead to a significant increase in the number of non-performing loans, which ultimately affects the ability of banks and insurance companies to continue to provide credit to borrowers.”
Of particular concern is U.S. banks’ refusal to participate in the Fed’s $ 600 billion Main Street loan facility, which targets small businesses. Only a tiny part of the installation has been used so far.
The number of U.S. small businesses in operation has fallen 24% since Jan.20, according to an estimate by tracktherecovery.org, and small business revenues are down 21%.
As of March 2020, the Federal Reserve nearly doubled the size of its balance sheet, buying $ 3 trillion in assets. It is unlikely to cut interest rates, but it will continue to increase its purchases of securities to support the economy. Loose monetary policy will continue to weigh on the US dollar, and falling gold prices present buying opportunity for investors