POWELL WARNING UNHEEDED BY TRUMP
Stocks fall after president cuts off stimulus talks as economic pain persists
Jerome Powell, the Federal Reserve chair, delivered a blunt message to Congress and the White House on Tuesday: Faced with a once-in-a-century pandemic that has inf licted economic pain on millions of households, go big.
Hours later, President Donald Trump delivered his own message: Not now.
In a series of conf licting tweets, the president said the economy was “doing very well” and coming back “in record numbers,” suggesting that no additional help was needed while also saying that he would wait until after the election to “pass a major Stimulus Bill that focuses on hardworking Americans and Small Business.”
While the chances of Congress reaching a deal on another package were already slim, Trump's directive sent markets swooning as the
reality sank in that the economic recovery, which is slowing, would not get another jolt before Nov. 3.
The S&P 500 fell more than 1 percent soon after Trump's tweet, after having been higher in the moments before.
In deciding to forgo any more immediate relief, Trump could be setting the economy up for the type of painful and “tragic” outcome that Powell warned about Tuesday. The Fed chair, who has increasingly called for more government help, said policymakers should err on the side of injecting too much money into the economy rather than too little.
“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Powell said in remarks before the National Association for Business Economics.
“Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy and holding back wage growth,” he said. “By contrast, the risks of overdoing it seem, for now, to be smaller.”
Nearly seven months into the pandemic, millions of Americans remain unemployed as the coronavirus keeps many service industries operating below capacity. The unemployment rate has fallen more rapidly than many economists expected, dropping to 7.9 percent in September, and consumer spending is holding up. But Powell again highlighted that the economy's resilience owed substantially to strong government assistance that has been provided to households and businesses.
That included direct payments to families, forgivable loans to small businesses and an extra $600 per week in unemployment benefits, which Powell said had “muted the normal recessionary dynamics that occur in a downturn,” like a hit to spending that causes additional layoffs.
But that assistance has since run dry, putting what Powell called an “incomplete recovery” at risk without the government pumping more money into the economy.
“There is still a long way to go,” he said regarding jobs, adding that “there is likely to be a need for further support” given “many will undergo extended periods of unemployment.”
The comments were a clear signal that the Fed remained worried about the economy's ability to continue its rebound without more government spending to prop up struggling households and businesses. One big risk, Powell noted, was that prolonged economic weakness could perpetuate job losses that have weighed most heavily on women, people of color and low-wage workers.
“A long period of unnecessarily slow progress could continue to exacerbate existing disparities in our economy,” he said. “That would be tragic, especially in light of our country's progress on these issues in the years leading up to the pandemic.”
Ernie Tedeschi, a policy economist at Evercore ISI, said that while Powell had made similar statements in the past, “this was more urgent.”
“I get the sense that he is getting worried that if we don't have another fiscal
package, that the recovery we've had may be in jeopardy,” Tedeschi said.
Powell has become an important inf luence for members of Congress during the pandemic recession, pushing for continued economic support and emphasizing that concerns about whether the government is taking on too much debt can wait until the crisis has passed. House Speaker Nancy Pelosi of California and Rep. Richard Neal of Massachusetts are among the Democrats who have cited his advice when discussing their efforts to pass more stimulus.
Yet despite Powell's increasingly frequent calls for sustained government help, lawmakers have been unable to reach agreement on additional aid for out-of-work families, struggling local governments and hard-hit businesses, including airlines. House Democrats passed a $2.2 trillion stimulus plan last week, but the White House and Republicans have rejected that price tag as too big.
Top Trump administration officials have played
down the need for another big fiscal package by pointing to the falling unemployment rate as a sign that the economy is experiencing a rapid rebound. And many Republican lawmakers have begun publicly fretting about the ballooning federal deficit, which is expected to top $3 trillion this year.
Powell, whose institution is set up to operate independently of the White House, was unambiguous in recommending a solution, one that contrasts with the message and example that has at times been held out by the Trump administration.
“We should continue do what we can to manage downside risks to the outlook,” Powell said, adding that doing so required “following medical experts' guidance, including using masks and social distancing measures.”
One of his colleagues was more blunt — and more worried.
“Because of the United States' inability to control the virus, we've experienced approximately 21 percent of the world's deaths, despite housing only about 4 per
cent of the world's population,” Patrick T. Harker, president of the Federal Reserve Bank of Philadelphia, said in a separate speech Tuesday.
The virus is still circulating even as cases come down in some places, Harker said, and “in recent days, we've even seen alarming spikes in other areas, like New York City, that we had hoped had permanently suppressed their infection rates.”
Fed’s measures
The Fed itself has gone to great lengths to support the economy, cutting interest rates to near-zero in March, rolling out a large bond-buying program and setting up emergency lending efforts, many of them backed by Treasury Department funding.
While the Fed invoked its emergency powers in the 2008 recession, it has gone even further this time, buying municipal debt and corporate bonds to shore up key markets.
Powell said he did not regret rolling out those programs, which had never been tried before and have
faced criticism from lawmakers and watchdog groups.
Some argue that the state and local government program isn't generous enough. Others insist that the corporate program should come with more strings — like employee retention requirements. Such restrictions would have been difficult or impossible to carry out in the Fed's current corporate bond program.
“I don't know how I would have been able to explain to the public that we didn't go to the limit of what we can do,” Powell said during a question-and-answer session after his remarks. “History will judge how well we did.”
Market downturn
Stocks had been drifting between small gains and losses for much of the day before gaining momentum into the late afternoon, then Trump's tweets knocked the market into reverse gear.
The S&P 500 fell 47.66 points to 3,360.97. The Dow dropped 375.88 points, or 1.3 percent, to 27,772.76. It had been up by more than 200 points. The Nasdaq composite lost 177.88 points, or 1.6 percent, to 11,154.60. The tech-heavy index had been on pace for a 0.5 percent gain before Trump cut off the stimulus talks.
The market's slide comes a day after the S&P 500 posted its best day in more than three weeks. Other stock markets around the world made mostly modest gains. Longer-term Treasury yields veered lower after Trump's remarks. They had earlier been hanging close to their highest levels in months.
Tuesday's selling was widespread, led by technology stocks and companies that rely on consumer spending. Utilities were the only gainers among the 11 sectors in the S&P 500.
Trading on Wall Street has gotten shakier recently as investors contend with a long list of uncertainties, from Trump's COVID-19 diagnosis to waxing and waning expectations about Congress' ability to deliver another round of stimulus for the economy.
The S&P 500 jumped 1.8 percent on Monday after Trump said he's returning to the White House to complete his recovery from the coronavirus, though his medical team said he's not yet fully “out of the woods.”
Several big challenges lie ahead of markets. Chief among them is the still-raging pandemic, as so clearly illustrated by Trump's stay in the hospital. The worry is that a ramp-up in infections could cause governments to bring back some of the restrictions they put on businesses early this year, which sent the economy hurtling into a recession.
“We're on the eve of earnings season and people are reasonably undecided as to whether the correction that started in September has further to run,” said Julian Emanuel, BTIG chief equity and derivatives strategist.
The upcoming election also still means a host of uncertainty about tax rates and regulations on businesses, while tensions between the United States and China continue to simmer.