Looking too far ahead into a distant future, Wall Street rallied back after hitting a multiyear low March 18 at 20,794.91 rocketing up June 3 to 27, 572.44 only 2,000 points off its Feb. 12 record high of 29,551.42. Knowing the damage to the U.S. economy, Wall Street battled back as close to its record high June 3, only to watch the market start to unravel, hearing more bad news from 68-yearold Federal Reserve Chairman Jerome Powerll. Powell tried to help Wall Street get back to some reality that any kind of economic recovery would take years, a very different picture presented than by the White House. Losing 170.37 today to finish at 26,119.61, the Dow gave back nearly half of its over 500 point gain Tuesday when all the news was about a sudden 17% gain in monthly retail sales. That optimism quickly vanished when Powell made clear that any economic recovery must be accompanied by more economic stimulus.
Wall Street looked so far ahead a time horizon for economic recovery that investors jumped on the bandwagon since markets bottomed March 18, one week after the World Health Organization [WHO] declared a global pandemic. Powell didn’t waste any time either slashing the Federal Funds rate March 15 to zero-to-a-quarter-percent, the sample level former Fed Chairman Ben S. Bernanke dropped rates to Dec. 15, 2008 at the height of the Great Recession. Powell confirmed that whatever happened then, the situation is far worse now with the Fed not knowing how to proceed in the Covid-19 era. When Powell urged Congress today in the strongest possible terms to pass another bailout bill to deal with possible bankruptcies for cities, counties and states, Wall Street finally got the message that things were getting worse. Wall Street realized that it got ahead of itself running the market up without fundamentals.
Powell said May 13 that the Fed was in new territory managing the fallout from the economic shutdown during the novel coronavirus crisis. Back in 2008, Bernanke knew where the bodies were buried in the Financial Crisis, something that Powell can’t say today. “I would think that it would be a concern if Congress were to pull back from the support that it’s providing too quickly,” Powell, said, watching the Dow swing about 400 points, finishing down 170 points. After running up since March 18, Wall Street’s starting to digest the bleak reality of what the economy faces in the months ahead. While everyone was elated about the steep rise in retail sales, it’s unlikely that can sustain itself, given the Depression-era levels of unemployment. While Covid-19 unemployment runs about 15% nationwide, some cities like Los Angeles see unemployment spiking to nearly Depression-era 30%.
Powell warned that the Fed’s dovish interest rate policy could continue into 2022 or longer, depending on how the economy responds. If Democrats take over Nov. 4, Goldman Sachs economist Jan Hatzius warned of tampering with the 2017 corporate tax cuts, something that could plunge the stock market 18% if Biden gets elected. “I do think it would be appropriate to think about continuing support for people who are newly out of work and for smaller businesses who are struggling,” Powell said, urging the White House and Congress to pass second CARES Act, this time addressing budget shortfalls in cities, counties and state governments “The economy is just now beginning to recover. It’s a critical phase and I think that support would be well-placed at this time signaling to Wall Street that things are far worse than imagined. Wall Street hoped more bailouts were not necessary.
With Powell slashing the Federal Funds Rate to zero-to-a-quarter-percent, there’s not much Powell can do other that start buying corporate assets or backstopping government bonds with cities, counties and states out of cash. “Monetary and fiscal policy are two very different things. I would urge you and the leadership of the Fed to stick to monetary policy,” said Rep. Patrick McHenry (R-N.C.). McHenry knows when Powell asks Congress to continue working on fiscal policy, he’s very concerned that monetary policy may be enough to dig the economy out of its hole. McHenry was surprised that Powell would ask Congress to repeat another bailout much like the first CARES Act that pumped $2 trillion into the economy. Fiscal policy, of course, is joined at the hip to monetary policy, because without the Fed printing enough cash and handing it to the U.S. Treasury nothing would work.
Powell hopes to influence Republicans in Congress to heed his call for more fiscal stimulus, something he can’t do at the Fed. “Your words of encouragement that we have or responsibilities on the fiscal side of the house I think are well-noted, and what you are telling us about the employment marketplace on a going-forward basis, I think, is informative for our policy making,” McHenry said. Unlike the Fed and Congress, Wall Street has a unique role to play in the nation’s recovery from today’s recession. Wall Street helps generate the investment capital needed for companies to add to the nation’s employment picture, recently shedding millions of jobs. “And so, thank you for your statements there, that additional congressional action is required,” including another CARS Act, needed to give consumers the needed cash to spend into the consumer economy to eventually stop the recession.
