The Fed has pushed back the planned closing date for its stimulus measures. That tells us the economy is in worse shape than stocks suggest.
The Fed released a statement this morning that it was extending its lending facilities to the end of the year. The facilities were previously set to expire at the end of September.
The facilities include programs for lending to main street businesses, the paycheck protection program, and better-known programs backstopping the credit market, the municipal bond market, and even the corporate bond market.
The move comes as the stock markets have almost fully recovered from their steepest drop in history back in March.
March also happened to be when the Fed pulled out all the stops and not only brought back programs it created during the 2008 financial crisis but added some new ones as well.
Why make such an announcement now?
With the ongoing pandemic, and with several states scaling back plans to reopen their economies, the odds of a second “lockdown” period seem to be on the rise. If that’s the case, substantial capital will be needed to keep the economy from a complete collapse.
While the Fed’s moves won’t be able to prop up the economy forever, they will hopefully last long enough to get back to a reopening.
Recently, the U.S. dollar has seen a decline relative to other currencies. Gold prices hit new all-time highs in dollar terms. With the Fed extending its lending facilities, there will continue to be downward pressure on the dollar.
If the overall economy remains as weak as Fed officials suggest, then chances are unemployment will remain stubbornly high.
Without consumer spending backstopped by extra unemployment benefits, more businesses can go under than we’ve seen so far.
Profits at publicly-traded companies will continue to weaken, and the stock market, currently propped up by just a handful of tech names, will likely start to move lower rather than higher.
The Fed has a unique role. It can get out ahead of a crisis faster than other policymakers.
If the Fed’s move is any indication, it’s a strong sign that politicians will be on board for further stimulus to prevent a re-test of the March collapse in economic activity (and the stock market).
For the stock market, volatility remains the likely outcome. This may end up costing retail traders like Dave Portnoy, whose day-trading prowess amidst this Fed-fueled market pump has led him to think he’s immune from losses.
The sooner day traders start taking economic risk seriously, the better. The problem is, with everything shut down, there’s been nothing better to do than gamble on stocks. Now, even that may become a casualty of the pandemic.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.
Last modified: September 23, 2020 2:09 PM