Policy in the bounceback

Posted by: Paul Donovan

10 Jun 2020

Daily update

  • The US Federal Reserve meets as the economy moves into the bounceback phase. While the US employment report probably overstated improvements, the US labor market appears to have stabilized. Fear of unemployment should moderate. Fear of the virus also seems to be less (activity is improving, even where infection rates are still rising). Fear is what has mattered most, economically. As always happens, markets initially underestimated people's resilience and adaptability in a crisis.
  • Easing policy is unlikely to change the willingness of consumers to spend their pent up savings – that will happen anyway. Taxing banks with negative rates would probably do more harm than good. Committing to keep rates (including bond yields) lower for longer seems the most helpful policy response.
  • Disinflation forces are still in evidence. Japan and China published price data that was within consensus ranges, but showed slowing price pressures. US consumer price inflation is likely to show the same thing.
  • Rhetoric around US-China tensions has continued, with remarks by US Secretary of State Pompeo overnight. Markets are less and less inclined to listen to the noise, as long as the trade deal remains intact. It seems unlikely that US President Trump would want additional trade taxes at the moment.

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