Chicago Federal Reserve president Charles Evans, hosting a virtual roundtable for news media, said that while the second-quarter gross domestic product was the worst on record, declining at an annualised rate of 32.9 percent, with about 18 million unemployed workers, some improvement was seen in May and June as many states eased their lockdown restrictions.
While there was a “substantial increase” in economic activity, however, the spread of the coronavirus also jumped, particularly in Arizona, California, Texas and Florida. Evans said he watched high-frequency data to track the progress of economy, and while mobility and other data was up in April and May, those indicators now appear to be flattening out, particularly for retail sales. He also noted that the expiration of the most generous unemployment benefits and eviction controls will be challenging to the economy, and renewed fiscal policy action will be crucial to aggregate demand.
The Chicago Fed president said his “baseline scenario” assumes the virus will not go away, but the spread will be more contained, with the unemployment rate improving by end of 2020 to 9.5%; and then to 6.5% by 2021, and 5.5% by 2022. That same baseline would envision inflation remaining low, and that monetary policy and the funds rate would remain flat through 2022, however Evans was quick to add that there are less optimistic scenarios that envision more serious consequences of the virus. He said his own outlook is a mix between the first baseline and a second, less optimistic view includes a second wave of the virus as children return to school, and could result in a higher unemployment rate.
Although Fed funds futures at the CME are pricing negative rates, beginning with the July 21 contract, Evans dismissed that move as an adjustment for term premia, especially when they go out further. “I am not going to draw a strong inference that people are really expecting negative rates just because of that futures price,” he said. “Although, I do think most recent data has not been as positive as hoped.
As for Monday’s slightly better-than-expected ISM manufacturing report, Evans said it was consistent with what he has heard talking to managers in that sector. “It’s been remarkable. Manufacturers have been able to navigate safety on the floor pretty well,” although they’ve had to invest, he added, “that doesn’t mean there haven’t been outbreaks,” but they’ve learned from them.
“I feel the PMI readings are consistent with manufacturing’s ability to do that,” Evans said. “The question is, how many (other) sectors of the economy are able to do that,” observing that the hospitality, travel and education sectors are more complicated.
“Monetary policy has an important role to play, but it’s not going to be able to solve the virus to make everybody’s workplaces safe,” Evans said. “I really don’t see us getting to maximum employment until the path of the virus is clear.”