Daily Commentary BY THE CURVE TEAM –

Fed Warns on Asset Prices and the Outlook

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The US Federal Reserve Chairman continues to warn on the outlook as uncertainty remains high.

Jerome Powell has been sounding warnings over the past week as economies around the world start to reopen, and in many countries, the virus is still not contained. In the Fed’s latest financial stability update on Friday night, the report said:

“Asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains reemerge.”

This was seen as a warning to markets not to get too far ahead of themselves given the lingering uncertainty over the outlook. On the outlook, the Fed Chairman had a bit to say in remarks last week and in some early excerpts from an interview set to air this morning our time.

Specifically on the near term outlook he said “Assuming there’s not a second wave of the coronavirus, I think you’ll see the economy recover steadily through the second half of this year.” 

However, there is likely to be a distinct difference between a recovering economy and one that has recovered, with Powell adding “For the economy to fully recover people will have to be fully confident, and that may have to await the arrival of a vaccine.”

The behavioural response to the health crisis and lockdown that followed will hold the key to the medium term outlook for not only the Australian economy but the global economy.

How much consumers and businesses decision making is effected by recent events will be crucial. In time things may revert to the path they were on. The recent experiences from going through a pandemic to witnessing the effects of containment measures will likely have some impact, even at the margin, which will see some things change.

David Flanagan

Director - Interest Rate Markets