Fed holds rates near zero, says U.S. has seen 'sharp declines' in economic activity

The Federal Reserve said Wednesday that it will keep interest rates at near-zero until the policymakers are “confident that the economy has weathered recent events.” Yahoo Finance's Jen Rogers, Myles Udland, Brian Cheung, and Tom Graff, of Brown Advisory, discuss on The Final Round.

Video Transcript

MYLES UDLAND: The Fed coming in with a number of important statements here, Powell really affirming where the Fed is at in their process of trying to help the economy through this coronavirus period.

Of course, we'll just start with the Fed's statement, which quite a bit different than what we've seen from the Fed over the last decade, just the way that they start the statement, the language they use in there, making no assessment of the US economy right now, not characterizing the health of the business or the consumer sector, talking about the tremendous human and economic hardship that we're seeing here in the US, using this phrase as needed to talk about their asset purchases longer term.

We've gotten obsessed with these small Fed phrases over time. So the latest one really going to be an amounts necessary they're talking about there, their QE program there.

Going through some of what Powell said during the press conference, he expects there'll be a double digit unemployment rate when we get the latest jobs report that's expected out a week from Friday. Also talking about the need for all levels of government to do what they can to support the economy in this time.

I want to bring in Yahoo Finance's Brian Cheung now for a little bit more on. Brian, what stood out to you during the press conference out of this statement? I think we're all trying to parse through and take away what our biggest thoughts are. I just want to start with where you feel like Powell took this conversation.

BRIAN CHEUNG: Yeah, I mean, [INAUDIBLE] we have to understand that the Fed's announcement today wasn't actually all that changed. There was no real change in the policy stance. The Fed had already cut interest rates to near zero and had launched what was effectively capitalist quantitative easing or asset purchases in treasuries and agency mortgage-backed securities.

So we're really listening into the Powell press conference for two things. First, what were his kind of expectations for where the US economy is going to go from here? And then, secondly, any sort of new detail on those nine liquidity facilities that the Federal Reserve had announced?

So on the first bit, on the US economy, it sounded like he did expect that this was going to be a long slog back. So he did say that he does expect consumer spending to rebound, keep in mind consumer spending being 70% of the US economy.

But he said it won't rebound to the levels that we saw before COVID-19. Because of things like social distancing, it will take time. And I think that's a translation for we shouldn't expect to see a V-shaped recovery.

And then on the second bit on the liquidity facilities, nothing necessarily new. Hoping that maybe he was going to provide some more color on if the Fed saw a need for covering kind of new holes in the wall, if you will, whether that's mortgage servicers or maybe nonprofits like universities.

But he did say that the mainstream lending program, which is really the cornerstone, if you will, of the Federal Reserve's efforts to try to plug the holes on Main Street because there is all these companies that are larger than those that qualify for PPP loans but too small to access capital markets, he said that should be up and running soon, although he didn't appear to really have any more details beyond what the Federal Reserve had already unveiled up to date.

So it seems like the Federal Reserve still has a lot of work to do on those liquidity facilities, but again, regardless, the actual policy changes today, not much in there.

MYLES UDLAND: All right, let's go to the markets now. They were higher earlier today. They remain higher. Jared Blikre, what stands out to you, just looking at the charts that we're seeing here?

And this rally continues. We're now on pace for really one of the best months we've seen in the market in quite some time. I think a stunning reversal for folks, given not only what happened in March, but where the virus still stands. The outbreak is still not I don't really think in the neighborhood of under control here in the US.

JARED BLIKRE: You said it. This has been an incredibly fast and furious rally that we've seen. Dow is up over 600 points, pressing up against session highs. Powell managed to get through the entire press conference without very much of a sell-off at all, very muted action here.

Here's the NASDAQ. It's up nearly 4%. We're seeing tech surge again and finally, lead again after being kind of dormant for a few days. S&P 500 is up over 3% as well. And here's the intraday. Well, this is actually a year to date. We'll take a look at that in a second. But here's the intraday price action, and everything here is from the announcement into the presser. And you can see we're making new highs right now.

Now if we go to a year to date-- and I do want to spend a few seconds on this because it's pretty important-- a lot of traders are interested in shorting at current levels, all the way up to the 200-day moving average, which is just above the 3,000 level, also coincident with this price action resistance line that we've been tracking since basically the beginning of the rally all the way down here. Is it going to work out? We have no way of knowing.

We do have month and pension fund rebalancing. And because of the incredible surge in equities that we've seen this month, it's estimated that pensions funds may have to sell $50 to $100 billion into Thursday, which is the end of the month. We'll have to see if that has any effect on markets. It seemed to at the end of the last month, which was also the end of the quarter.

Let's also take a look at the VIX because that has been flirting with the 30 line, generally perceived that the low 30 is kind of a return to normal. Of course, we are trading near 10 to 12.15 in the lead up to the coronavirus when we're making all time highs.

And then we have the chip index here. The Philly Chip Index has just been surging today. Very impressive, especially given the fact that AMD issued such weak guidance yesterday, the market just shrugging off. So we have a lot of canaries in the coal mine that are signaling it's still risk on.

So here is a 10-year T-note yield, kind of flat today, up about two basis points, still around that 0.6 level. Really want to see that lift off, but in the meantime, not really having too much of an effect on the markets. I guess, we'll take a look at the Dow heat map here because we do-- this is going to be-- here is the Dow.

We can see Microsoft up over 4% ahead of its earnings, Apple up over 3 and 1/2%, Visa up 6%, JP Morgan up over 3%. Financials have been leading over the last few days. And the sector that's been doing the best is energy. Energy has been up, I think, 31% this month, and there you can see it's leading again today. Very impressive, especially given the delve into negative prices last week that we saw in crude oil.

So this will be my last chart. We'll check on crude oil today. And we can see it is up 23%. It was up nearly 30% earlier. Myles.

MYLES UDLAND: All right, Jared Blikre with the latest on where we stand in the market right now. For a little bit more on the Fed, I want to bring in Tom Graff. He's the head of fixed income at Brown Advisory. And Tom, I guess, we'll just start with your thoughts on what we heard from Powell today and really what you've made of the Fed's actions in the last two months.

TOM GRAFF: Yeah, thanks, Myles, for having me. Look, I think the Fed kind of stuck to their message, that they're trying to build a bridge between where we are now and when the economy can start opening again. I think Powell was pretty realistic about their ability to provide further stimulus right this moment, but also wanted to emphasize that when the time comes, they'll do whatever they can do to make sure it's a robust recovery.

MYLES UDLAND: And then, I guess, Tom, you know, I think there's been a lot of misunderstanding around what the Fed has done and what the Fed might do. Do you think that Powell can really do anything to allay those fears? I mean, we're having people say, oh, the Fed is going to start buying equities.

And I don't think there's anything that he's done that suggests that, but it certainly is now a market talking point that the Fed's kind of gone off the reservation. I mean, how do you think Powell can navigate that kind of environment?

TOM GRAFF: Well, so it is a tricky balance he's got to go. So he wants to make sure that he doesn't close the door on further stimulants, so he doesn't let the market think that they're out of ammo or that they can't do anything more. Because I think that's a mistake that Bernanke made in 2009.

But on the other hand, there are some I think much less likely things that are floating around. One of them is negative interest rates, and the other is buying equities. I earlier said that I think the Fed wants to build a bridge between here and the recovery period. I don't know what buying stocks achieves in that regard, whereas keeping the financial markets functioning, right, keeping debt markets open, making sure companies can access capital if they need it, that's a bridge action.

So I think there's a sense that the Fed just wants to prop up markets. And actually, Powell started swatting that down a little bit earlier today, even though he didn't mention the equity thing specifically.

BRIAN CHEUNG: Hey, Tom, it's Brian Cheung here. So listening into Powell's press conference, I was looking for forward guidance. That's what the Fed said ahead of exogenous shock that it was going to use to try to battle the crisis.

And I think that it seemed like it was a little vague what he was trying to say here. He didn't really have a number on where he'd see unemployment going. He said that quantitative easing is still capitalist for right now. It necessarily commit to a certain amount of purchases, as maybe many on Wall Street had expected ahead of this meeting. What did you gather from the forward guidance aspect of Powell's communication just now?

TOM GRAFF: Look, I personally think that this sort of forward guidance is a bit more effective than what the Fed was trying back during the 2008 and subsequent recovery. At that point, they wanted to-- at first, they were giving literal time horizon guidance. But then later, he gave sort of vague-- for a long time, for an extended period type.

What Powell is now saying is, look, we're going to be at zero until the economy appears on its way to a robust recovery. I think within the Fed, the time they lifted off in 2015 is seen as a mistake now. So I think they want to avoid repeating that, avoid this sense that some number higher is the center of gravity toward which interest rates are going to flow when things are normal.

So I think rather, what they'd say is, we're going to keep interest rates at zero until unemployment is dramatically lower than where it is now.

MYLES UDLAND: And then I guess, Tom, along those lines, thinking about this Fed regime, the Powell Fed regime, versus Bernanke Yellen, which was pretty much one continuous leadership structure there, I mean, Powell talks a lot about-- he said it right in his first sentence, that the folks least able to bear the economic burden of this are stuck with it. He has this, I think, populist kind of view of how distribution works in the US economy right now.

Do you think that is also informing his lack of using economist type guidance, I guess? I mean, he's not an academic, but he also seems to be looking at the economy in a very different way than some of his immediate predecessors.

TOM GRAFF: Yeah, I was definitely struck by-- when he respond to one question with, that's exactly what I worry about, about I didn't think that Bernanke or Yellen would have put it that way.

I'm not sure that he has a completely different viewpoint so much as I think we saw in the last, say, two years prior to the coronavirus crisis, how much benefit was garnered to the bottom end of the income structure, which [INAUDIBLE] does include a lot of minorities and other disadvantaged communities. Right? We saw how much benefit was garnered to them, and I think he's forlorn a bit that that might get lost, sort of through no fault of anybody.

So I do think-- I don't-- again, I'm not sure that if Bernanke or Yellen were in the seat at this moment, that they would have a different point of view. But I do think Powell is bringing something else to the table than what was coming at that time.

JEN ROGERS: And I was really struck by what he said at the beginning. It seemed a little bit like a different Chair Powell in a way. And I've been going through the exercise of just sort of sliding doors of it all. What would we have been discussing right now if coronavirus hadn't come along?

And I just went back to the past Fed meetings and was looking at questions we were asking, and some of those were around inflation and the idea that the Fed was willing to let this economy run a little hotter than usual-- over 2%. And then to hear Chair Powell say multiple times today we are in no hurry.

So in terms of their patience here and what we were thinking before about inflation, do you have any thoughts on what this kind of move by the Fed, all these facilities coming in, is going to do to inflation in the long run?

TOM GRAFF: Well, I think it's really tricky. So I think there is a scenario where there is a burst of demand during a recovery phase that sort of front runs the improvement in supply chains, such that could cause some inflation.

But honestly, I think if inflation ran at 2.3, 2.4, 2.5 for a short period of time, the Fed will be elated. They've been trying to get inflation expectations somewhat higher for multiple years now. It hasn't been successful. So I think [INAUDIBLE].

The other thing that would make them elated in that scenario is the fact that there's a burst in demand in the first place to cause this scenario to happen. So I think any of the inflation scenarios are ones where something's gone right about the Fed's policy. And I think they'll actually be pretty happy with the outcome.