GDP and the Fed Meeting - July 29, 2020

Second quarter Gross Domestic Product (GDP) is expected to decline at the steepest pace on record.

  • Consensus forecast: a 35% annualized decline (Econoday) vs the prior record of 10% in 1958 (which was affected by the Asian flu pandemic).

Without minimizing the pain the recession and Covid have caused, the report is a rearview-mirror look at the economy: April through June.

  • Investors are always looking ahead.

While visibility is limited, economists per the WSJ Economic survey project a 15.2% rise in Q3 and 6.8% rise in Q4.

  • Much will depend on the path of the virus.

The Fed speaks

The Federal Reserve is unlikely to lower rates. Currently, the fed funds rate is at 0 – 0.25%.

Fed Chief Jerome Powell is likely to acknowledge the strong uptick in economic activity in May and June but will probably emphasize the extraordinarily high degree of economic uncertainty amid the resurgence of the virus.

A concern for the Fed: in order to contain the virus, safety protocols and some type of temporary limits on economic activity may be needed, which would hamper the economy in the short term.

Powell is likely to stress the Fed stands ready to use all the tools in its toolkit to support the economy.

Stocks have reacted favorably to the Fed’s massive response since March, but there are limits as to what the Fed can do.