Show Transcript
Anthony Okolie recaps the news of the day including the latest COVID-19 updates, followed by a conversation with James Marple, Senior Economist, TD Bank Group, about the latest Federal Reserve rate decision and the outlook for the US economy.
Print Transcript
- Hello, and welcome to the MoneyTalk COVID-19 Daily Bulletin for Wednesday, June 10. I'm Anthony Okolie. In a few minutes, I'll be speaking with James Marple, Senior Economist at TD Bank Group, about the latest Fed decision on interest rates. But first, a quick wrap of today's headlines.
And we start with that decision. As expected, the US Federal Reserve left its key rate unchanged at 25 basis points, but signaled no further rate hikes through 2022. Canada's GDP will contract by 8% this year without a second wave of COVID-19, and 9.4% if a second lockdown is necessary.
That's what the Organization for Economic Cooperation and Development is forecasting. The latest dose of bad news for investors in Starbucks. The coffee chain giant expects third quarter sales to plunge by $3 billion US due to COVID-19.
Finally, streaming services will have new competition in July. AMC Theaters, the world's largest movie theater owner, announced that it is planning to reopen its 1,000 theaters around the world next month. And that's a wrap of today's headlines. Next, my conversation with James Marple.
James, as expected, the Fed left rates unchanged at 25 basis points. But the tone was fairly dovish. They came out and said that they're not trying to hike interest rates until 2022. What was your takeaway from today?
- Sure. Well, not a lot of change to the actual policy statement itself. The one thing they noted is that they would continue to purchase assets, at least at the current pace. Which, to me, indicated a bias to doing more rather than less.
As you mentioned, the other big thing that came out of this statement was new projections from FOMC members on where the Fed funds rate they expect it to be, as well as on the economy, the unemployment rate, and inflation. I mean, I wasn't too surprised that they had those Fed dots right at 0 all the way out until 2022.
There were actually only two Fed members that had dots any higher than that. And one was just above 0.25%, so not much of an increase. And the other one was just above 1%. So the rest of them just seeing rates on hold.
But when you look at their economic projections, you know, they have a 6 and 1/2% decline in economic activity. Which is, of course, you know, that's what all the other forecasts look like, but unprecedented outside of the Great Depression. And then a rebound in activity that isn't as strong as the decline in 2021.
So it's going to take, in their view, and I think in the view of most people, a long time for the economy to get back to normal. And then on the inflation front, they had inflation actually not getting back to their 2% target by 2022. So all of that says, you know, if you have unemployment elevated, you have inflation below target, you should be doing more rather than less.
And we'll see. I mean, they didn't commit to doing anything more in this statement. But I would suggest that, given their economic outlook, that's coming sometime in the future.
- And I want to talk a little bit about inflation, because we also got a look at May consumer inflation numbers is actually down in May, except for food prices. Do you think that the Fed moved aggressively enough to prevent the full risk of deflation?
- Well, I mean, it's a very difficult thing to say for sure. I mean, I think a lot of what we're seeing right now is a direct result of, obviously, the pandemic and the shutdown. So you've seen big price declines for things like travel and things like retail purchases-- you know, clothing, and obviously food and anything purchased outside the home. Sorry, not food, but restaurant services and things like that.
Obviously, if it's things that are purchased in the home, like food, like going to the grocery store, those things have gone up in price. And of course, that was exacerbated last month by the fact that you had a lot of meat plants shut down. So actually, meat prices were up extraordinarily high.
I mean, I think in the near term, we have, obviously, a severe demand shock. We see that in a double digit unemployment rate. But the inflation outlook, obviously, very highly dependent on, do we see the economy reopen, do we see sort of a rebound, as is even expected, I would say, in the economic outlook for the Fed.
And if we don't see that, and maybe it's a bit too early to say for sure-- and let's remember, there's a lot of uncertain even about the course of the virus. And are we through the clear in terms of actually bringing the caseload down? But if we are, we may be OK. And if not, then obviously the Fed's going to have to do more.
- I want to get back to rates again. They said that no interest rate hikes through 2022. Are the fears of negative interest rates overblown at this stage or is that still a risk?
- Well, I would say that I think the Fed has been pretty clear that they see that as pretty down the list of things they would want to do in terms of policy rates. So they have other options on the table. For one, they could add additional purchases. They actually talked about doing that.
At the same time, they could have forward guidance that ties the Fed funds rate to a specific target for inflation or even average inflation, saying, look, we're under target and we've been under target for the last little while. We want to see an average rate of inflation, including this period in which we've under shot, get to our 2% target.
And that's going to imply rates being low for an extended period of time. And the hope is that that allows them to control the yield curve. Speaking of which, they could actually set out a target for the 10 year rate that they say, we're going to anchor it down at a specific threshold. We've seen the Bank of Japan do that. And I think all of those things are more likely than them actually taking the policy rate negative.
Having said that, obviously, if we continue to see the economy depressed and we don't get back up to a state of normal, negative rates are a possibility. I would say, though, that negative rates are not congruent with what else we're seeing in financial markets. We're seeing negative interest rates by the Fed. It's not a world in which you're at an all time high on the S&P 500.
- What are some the key US indicators that you're watching to see how well the US is recovering from the pandemic?
- Sure. Well, that's a great question, because some of the typical traditional economic indicators are now a bit lagged. Obviously, watching very highly the employment report, and everyone is surprised by the rebound in jobs that we saw last week. But a lot of attention had been on those weekly jobless claim numbers, and that's actually what misled people because it only shows you one side of the equation.
You knew a lot of people were getting laid off. What we didn't know is how many people were being rehired. But you can get a sense of some of that in some of these nontraditional indicators. Things like mobility data from Google and even from Apple that shows how foot traffic at places like retail outlets.
And you see some of these other indicators, you know, in the housing market, the number of listings and the number of showings have actually rebounded quite swiftly. You have weekly indicators of mortgage applications. So really, some of those very high frequency data, when we're looking for a turning point-- that, I think, combined, obviously, with just watching policy announcements.
What are states saying in terms of what businesses are going to be allowed to open up? And then hopefully you can combine that with some of those other data and eventually the hard economic data to get a sense of what different policies are going to mean for the economic outlook.
- I just want to wrap it up with a final question on the US dollar. Given that the Fed is not looking to raise rates for-- at least until 2022, where do you see the US dollar going for the next little while?
- Well, I think probably nowhere fast. But, I mean, obviously, that depends on the relatives, you know, which cross we're talking about. If we're talking about Canada, I mean, there's some reasons to think, potentially, the Canadian dollar could improve. I mean, we've seen, obviously, the oil price outlook improve a fair bit, and we've seen supply cut very dramatically.
And that could lead to some improvement in the Canadian dollar. I think, also, we've seen some solid success in Canada in terms of moving case counts down. And so, again, the course of the relative health outcomes, I think, could be something that even drives market outcomes for things like exchange rates.
- James, thank you very much for your time.
- Oh, you're very welcome.
[MUSIC PLAYING]
And we start with that decision. As expected, the US Federal Reserve left its key rate unchanged at 25 basis points, but signaled no further rate hikes through 2022. Canada's GDP will contract by 8% this year without a second wave of COVID-19, and 9.4% if a second lockdown is necessary.
That's what the Organization for Economic Cooperation and Development is forecasting. The latest dose of bad news for investors in Starbucks. The coffee chain giant expects third quarter sales to plunge by $3 billion US due to COVID-19.
Finally, streaming services will have new competition in July. AMC Theaters, the world's largest movie theater owner, announced that it is planning to reopen its 1,000 theaters around the world next month. And that's a wrap of today's headlines. Next, my conversation with James Marple.
James, as expected, the Fed left rates unchanged at 25 basis points. But the tone was fairly dovish. They came out and said that they're not trying to hike interest rates until 2022. What was your takeaway from today?
- Sure. Well, not a lot of change to the actual policy statement itself. The one thing they noted is that they would continue to purchase assets, at least at the current pace. Which, to me, indicated a bias to doing more rather than less.
As you mentioned, the other big thing that came out of this statement was new projections from FOMC members on where the Fed funds rate they expect it to be, as well as on the economy, the unemployment rate, and inflation. I mean, I wasn't too surprised that they had those Fed dots right at 0 all the way out until 2022.
There were actually only two Fed members that had dots any higher than that. And one was just above 0.25%, so not much of an increase. And the other one was just above 1%. So the rest of them just seeing rates on hold.
But when you look at their economic projections, you know, they have a 6 and 1/2% decline in economic activity. Which is, of course, you know, that's what all the other forecasts look like, but unprecedented outside of the Great Depression. And then a rebound in activity that isn't as strong as the decline in 2021.
So it's going to take, in their view, and I think in the view of most people, a long time for the economy to get back to normal. And then on the inflation front, they had inflation actually not getting back to their 2% target by 2022. So all of that says, you know, if you have unemployment elevated, you have inflation below target, you should be doing more rather than less.
And we'll see. I mean, they didn't commit to doing anything more in this statement. But I would suggest that, given their economic outlook, that's coming sometime in the future.
- And I want to talk a little bit about inflation, because we also got a look at May consumer inflation numbers is actually down in May, except for food prices. Do you think that the Fed moved aggressively enough to prevent the full risk of deflation?
- Well, I mean, it's a very difficult thing to say for sure. I mean, I think a lot of what we're seeing right now is a direct result of, obviously, the pandemic and the shutdown. So you've seen big price declines for things like travel and things like retail purchases-- you know, clothing, and obviously food and anything purchased outside the home. Sorry, not food, but restaurant services and things like that.
Obviously, if it's things that are purchased in the home, like food, like going to the grocery store, those things have gone up in price. And of course, that was exacerbated last month by the fact that you had a lot of meat plants shut down. So actually, meat prices were up extraordinarily high.
I mean, I think in the near term, we have, obviously, a severe demand shock. We see that in a double digit unemployment rate. But the inflation outlook, obviously, very highly dependent on, do we see the economy reopen, do we see sort of a rebound, as is even expected, I would say, in the economic outlook for the Fed.
And if we don't see that, and maybe it's a bit too early to say for sure-- and let's remember, there's a lot of uncertain even about the course of the virus. And are we through the clear in terms of actually bringing the caseload down? But if we are, we may be OK. And if not, then obviously the Fed's going to have to do more.
- I want to get back to rates again. They said that no interest rate hikes through 2022. Are the fears of negative interest rates overblown at this stage or is that still a risk?
- Well, I would say that I think the Fed has been pretty clear that they see that as pretty down the list of things they would want to do in terms of policy rates. So they have other options on the table. For one, they could add additional purchases. They actually talked about doing that.
At the same time, they could have forward guidance that ties the Fed funds rate to a specific target for inflation or even average inflation, saying, look, we're under target and we've been under target for the last little while. We want to see an average rate of inflation, including this period in which we've under shot, get to our 2% target.
And that's going to imply rates being low for an extended period of time. And the hope is that that allows them to control the yield curve. Speaking of which, they could actually set out a target for the 10 year rate that they say, we're going to anchor it down at a specific threshold. We've seen the Bank of Japan do that. And I think all of those things are more likely than them actually taking the policy rate negative.
Having said that, obviously, if we continue to see the economy depressed and we don't get back up to a state of normal, negative rates are a possibility. I would say, though, that negative rates are not congruent with what else we're seeing in financial markets. We're seeing negative interest rates by the Fed. It's not a world in which you're at an all time high on the S&P 500.
- What are some the key US indicators that you're watching to see how well the US is recovering from the pandemic?
- Sure. Well, that's a great question, because some of the typical traditional economic indicators are now a bit lagged. Obviously, watching very highly the employment report, and everyone is surprised by the rebound in jobs that we saw last week. But a lot of attention had been on those weekly jobless claim numbers, and that's actually what misled people because it only shows you one side of the equation.
You knew a lot of people were getting laid off. What we didn't know is how many people were being rehired. But you can get a sense of some of that in some of these nontraditional indicators. Things like mobility data from Google and even from Apple that shows how foot traffic at places like retail outlets.
And you see some of these other indicators, you know, in the housing market, the number of listings and the number of showings have actually rebounded quite swiftly. You have weekly indicators of mortgage applications. So really, some of those very high frequency data, when we're looking for a turning point-- that, I think, combined, obviously, with just watching policy announcements.
What are states saying in terms of what businesses are going to be allowed to open up? And then hopefully you can combine that with some of those other data and eventually the hard economic data to get a sense of what different policies are going to mean for the economic outlook.
- I just want to wrap it up with a final question on the US dollar. Given that the Fed is not looking to raise rates for-- at least until 2022, where do you see the US dollar going for the next little while?
- Well, I think probably nowhere fast. But, I mean, obviously, that depends on the relatives, you know, which cross we're talking about. If we're talking about Canada, I mean, there's some reasons to think, potentially, the Canadian dollar could improve. I mean, we've seen, obviously, the oil price outlook improve a fair bit, and we've seen supply cut very dramatically.
And that could lead to some improvement in the Canadian dollar. I think, also, we've seen some solid success in Canada in terms of moving case counts down. And so, again, the course of the relative health outcomes, I think, could be something that even drives market outcomes for things like exchange rates.
- James, thank you very much for your time.
- Oh, you're very welcome.
[MUSIC PLAYING]
