Economic pragmatism until 2022

The Federal Reserve left interest rates unchanged last week, in the 0%–0.25% range. This decision was widely anticipated by the markets. At the end of the meeting, Jerome Powell said: ‘They will remain at this very low level at least through 2022. We’re not even thinking about thinking about raising rates […] what we’re thinking about is providing support for this economy.’  However, the new economic forecasts have somewhat dampened the enthusiasm created by employment figures. The Fed was reserved with regard to the last figures published at the beginning of the month. The Chairman of the US central bank centred his remarks on the job market, saying that the good figures for May did not exclude a risk of lasting deterioration and therefore the job market should, in the future be his main objective. The United States started the year with an unemployment rate of 3.5%, the lowest in fifty years. Then came COVID-19 and, in three months, 43 million workers out of a working population of 164 million were unemployed and the unemployment rate climbed to 14.7% in April, before falling to 13.3% last month. According to the Fed, it will still be 9.3% and 6.5% in 2021 for the year. Furthermore, it does not share the expectations of a V-shaped recovery, which have significantly contributed to the recovery of the financial markets. According to his forecasts, American growth should plunge by 6.5% this year and only rebound by 5% in 2021 and 3.5% in 2022.

The Fed’s cautious attitude towards the economic outlook, the acceleration of the number of coronavirus cases in the United States as well as in Beijing and the renewed volatility of the stock markets quickly brought the Swiss franc and the other safe havens back to the forefront. Our currency, which had weakened against the euro up to CHF 1.0915 on June 5, has begun to rise again. The Japanese yen, which had almost touched 110 yen to the dollar on that same day, did the same and has also begun to rise again. Finally gold has cleared the $1,700/oz mark.

After the Fed, which decided to buy corporate bond debt to further support the sectors hardest hit by the coronavirus, the Bank of Japan has once again increased the budget for its rescue programmes for companies facing the vast economic crisis while keeping their already ultra-accommodative monetary policy unchanged. After announcing last month a financial package worth the equivalent of 700 billion dollars, it announced at the end of its meeting yesterday that it would increase said programme by another 300 billion.

The central bank of Morocco cut its key rate by half a percentage point, to 1.5 %. This is the biggest drop in its history and the rate had remained at 2% since June 2016. The institution also exempted the financial establishments from holding reserves to cover their loans with the aim of stimulating the economy of the kingdom which is coming out of a painful, 3-month lockdown.

The main US stock market indices fell over the week following the Fed meeting and Mr Powell’s cautious comments. The Dow Jones lost 3.6%, the S&P was down 2.57%. The Nasdaq fared better with only a 0.58% loss. In Europe, the decline is also marked, between 1.5% and 3.3%. This is despite the strong rebound that the stock markets experienced yesterday.

This week remains busy on the central bank front. Many have yet to issue their decisions. This will be the case for the Bank of England, the Swiss National Bank and the Bank of Norway on Thursday, and lastly the Central Bank of Russia on Friday.

Level