COVID | Monetary Policy & Inflation | US
We’ve been arguing that COVID should trigger a US recession and now it seems the Fed is worried too. It’s dramatic 100bps cut yesterday brings interest rates back to crisis levels of almost zero percent. Typically, the start of Fed easings is one of the best indicators of an imminent US recession. Almost always, US unemployment surges soon after (Chart 1).
While the easings should in theory help the economy, they usually come at a time when the economy has generated its own downward momentum. This time is likely no different. And while many economists are now revising down their forecasts (see our latest US Recession Tracker [add link]), not many are talking about sharp rises in unemployment.
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We’ve been arguing that COVID should trigger a US recession and now it seems the Fed is worried too. It’s dramatic 100bps cut yesterday brings interest rates back to crisis levels of almost zero percent. Typically, the start of Fed easings is one of the best indicators of an imminent US recession. Almost always, US unemployment surges soon after (Chart 1).
While the easings should in theory help the economy, they usually come at a time when the economy has generated its own downward momentum. This time is likely no different. And while many economists are now revising down their forecasts (see our latest US Recession Tracker), not many are talking about sharp rises in unemployment.
As for actual US data, we’re tracking numerous high frequency indicators. A revealing one is the collapse in US movie box office receipts this past weekend. It was 80% lower than last year (Chart 2). In fact, it could be the lowest since 1995. With restaurants, bars and schools starting to close in various cities – growth numbers are likely to get much worse.
This suggests that equity and credit weakness has likely further to go. But this suggests that policymakers will take further actions to stem declines. One route for the Fed would be to follow the BoJ and ECB in broadening asset purchases to credit and equities.
Another more extreme measure would be to shut equity markets for a period of time. We wrote about this as a Grey Swan for 2020 at the end of last year. The important thing is that nothing can be ruled out at this stage. Let’s see what they announce over coming days and weeks.
Chart 1: Unemployment Rises After Fed Eases
Source: Fed, BLS, Macro Hive
Chart 2: Collapse in Movie Box Office Sales (mid-March)
Source: Box Office Mojo, Macro Hive
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)