For decades the Federal Reserve has spoken very softly and in code which was call “Fedspeak” to avoid crazy and unnecessary swings in the markets based solely on the remarks by Federal Reserve officials. This Fed and this Chairman is unafraid to venture where no other Fed has gone before …

1. The fastest central bank to market with Quantitative Easing (QE)
2. The broadest range of bonds included in the QE programs with the addition of Fallen Angels (or below investment quality bonds),
3. The broadest eligibility for the Main Street Lending program by dropping loan sizes to $ 500K to include small and more midsized businesses,
4. And now speaking plainly!

Yesterday morning, the Federal Reserve Chairman, Jerome Powell said that the path ahead is “highly uncertain and subject to significant downside risks.” The Dow Jones Industrial Average which had been trading at the higher end of the range set at the beginning of this quarter immediately sold off 700 points and has continued down this morning. Overall, it’s down 7% from the April 29^th high. S&P has followed suit. The tech heavy index is off 5.6% from its April 29^th high.

Is this a case of overreacting to the fed? Or recognition that the potential length and severity of this downturn is greater than initially priced in?

IN THE WEEDS

The past two weeks the newspapers have been filled with headlines on the “Disconnect between Main Street and Wall Street.”  However, as those of you who have been reading my blog well know, Wall Street has been doing what the Fed has asked them to do ~ 1) trade within a moderate range, 2) look through the immediate bad news to the other side of the recovery, 3) support credit markets ~ all 3 steps for the sole purpose of allowing for necessary liquidity to flow to businesses keeping bankruptcies down and Americans employed (at least as much as possible!)  So what has changed?

Nothing really!  The Fed and all of the economists have said the duration or length of the Health Crisis will determine the severity of the downturn. Various presidents of Federal Reserve Banks have said for several weeks that the likelihood of a Deep V Recovery (a quick in and bounce back) was growing highly unlikely because of the 2^nd wave of infections being observed oversees. Several have even called out 18 months for a vaccine as the duration of the Crisis. Market chatter has been fairly consistently settling in on a U shaped 2 to 2 ½ years and now adding the Niki Swoosh shaped recovery of 3 to 3 ½ years to the dialog.  (How’s that for free advertising!)

What is unusual is to have the Chairman of the Federal Reserve come out with such blunt language. Alan Greenspan, the Federal Reserve Chairman from Aug. ‘87 to Jan. ‘06, perfected the concept of “Fedspeak.” He coopted the term from Newspeak in George Orwell’s novel Nineteen Eighty-Four. And yes if you did your high school English reading, the parallels are intentional. In reality, the Fed’s communications were filled with very carefully and intentionally chosen language to ensure the markets did not overreact nor create self-fulfilling prophecies. Greenspan is also credited with the term “irrational exuberance” famously used in describing the housing market just before the Great Recession.

So why such blunt language now?  Given the extension of the duration from a short window of 3 to 4 months to an 18 month window, the Chairman laid the ground work for additional economic support which “may mean that it’s necessary for us to do more.”  His statements come only a day after House Democrats unveiled a new $ 3T relief bill and Trump commented on the bill being DOA ~ Dead on Arrival.  Yet again, the Fed is showing much needed leadership. Under Powell’s leadership, all members of the Federal Reserve system are consistently and openly discussing key risks facing the U.S. Economy in this unprecedented period. They are giving all of us the tools to take ownership of our lives and to make healthy financial decisions. I am immensely grateful for the honesty and directness.  Given these facts and our rapidly changing environment, its’ definitely time to step back, assess our finances, our investment strategies, and plan for the next 5 years.  No time like the present!

As always what can we do?

Be smart about going out & about, stay healthy, help those in need within your community, get outdoors to enjoy this clean air, and be your amazing selves!

Stay Safe! Susie