The US Federal Reserve is not dialling back its economic support measures just yet, revealing this week it would hold interest rates at near-zero for some time yet.

The move is expected to spur investors to top up their portfolios and bring to a halt the threat of a second market slump.

On Wednesday, Fed chairman Jerome Powell said COVID-19 and the measures taken to control its spread had induced a sharp decline in economic activity and a surge in job losses.

“Indicators of spending and production plummeted in April, and the decline in real GDP in the current quarter is likely to be the most severe on record,” he said.

“Even after the unexpectedly positive May employment report, nearly 20 million jobs have been lost on net since February, and the unemployment rate has risen about 10 percentage points, to 13.3 percent.”

Powell said the Fed planned to maintain the interest rate at near-zero “until we are confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals”.

While interest rates were widely expected to stay the same, it was Powell’s comments following the meeting that piqued interest. As Stockhead pointed out yesterday ahead of the meeting, these comments can be an important indicator for investors.


‘Backstop’ for stocks

Nigel Green, CEO of global investment fund deVere Group, pointed to Powell’s comments that the pandemic “weighs heavily” on the American economy — the largest in the world — and the Fed would do “whatever we can, and for as long as it takes” to support the recovery and “limit lasting damage” to the economy.

“Against this backdrop, further stimulus can be expected from the Fed — and also perhaps from Congress too — in the near future as the economic revival will be a longer process than many had hoped,” Green said.

“This ‘backstop’ from the Fed slashes the threat of a second market slump even if economic data comes in worse than next quarter.

“It provides something of a ‘floor’ for equities.”

Green said as a result of this, investors would be seeking to further top-up their investment portfolios to get ahead at lower entry points, before the hike in values expected to kick-in with another round of stimulus.

The recent rally of stock markets has raised concerns that investors are too optimistic and that markets are not accurately reflecting the severity of the economic impact.

However, Green says it could also be the case that markets are giving investors clear signals for the current and future shape of the economy, in which there are and will be distinct winners and losers, unlike in other recessions.

“The Fed believes the economic outlook for the rest of this year will be tough,” he noted.

“But it will continue to purchase government-backed debt ‘at least at the current pace’ and the markets believe this will be further increased in order to maintain smooth market function.

“This will support and likely boost asset prices moving forward. Investors will now be eyeing the opportunities before any fresh or enhanced stimulus packages are announced.”