Skip To Content

Fed Signals Economic Uncertainty
Still Lies Ahead

May 28, 2020

By Matt Kelley
Portfolio Strategy Manager, ESL Federal Credit Union

Fed Chair Jerome Powell spoke with the Peterson Institute for International Economics on Wednesday, May 13. The topic of the speech, and following discussion, was the current state of the economy and the measures taken to offset the effects of the virus.

On the economy and eventual recovery, Powell echoed what has been said before, “The scope and speed of this downturn are without modern precedent…the path ahead is both highly uncertain and subject to significant downside risks.” Powell noted that the primary concern is the length of the crisis, as deeper and longer recessions can leave behind lasting damage to the productive capacity of the economy. As I have mentioned before, uncertainty around the length of the recession will be a primary driver of market volatility going forward.

Also mentioned were the policy responses to date, from both the Fed and Congress. While Powell stated that the Fed will continue to use their “tools to their fullest,” he did remind us that the Fed has only lending powers that can serve to provide temporary liquidity. Notably, he suggested that more fiscal support, while costly, could be necessary. The issue here is that the effect of the initial stimulus (in this case the direct payments to individuals) is the subject of ongoing debate. Some argue that if stimulus funds are not being used for spending: only saving and paying down debt, the stimulus will not have the intended effect on economic activity. According to recent reports, April advanced retail sales are down 16.4% from March and down 21.6% from April 2019, indicating historically low retail expenditures.

Advance Monthly Sales for Retail and Food Service, ex Auto and Gas
Source: Data Extracted on: May 19,2020 (2:03pm) EDT
These data are subject to sampling and nonsampling error. For more information see United States Census Bureau.

State of Consumer Confidence

Retail sales is a great indicator for consumer spending and demand, and includes e-commerce, along with brick and mortar retailers that have seen the worst of the mandated shutdowns. We cannot know how bad the economic toll would be without direct fiscal payments from the CARES Act; however, we can see that stimulus payments alone are not filling the economic gap caused by the crisis. Powell said it best, “How long will it take for confidence to return and normal spending to resume?”

For confidence to return we can look to unemployment. Powell noted, “Long stretches of unemployment can damage or end workers' careers as their skills lose value and professional networks dry up, and leave families in greater debt.” We will continue to see large initial unemployment claims, but we should now look to continuing unemployment claims to get an idea of the effect of both the Paycheck Protection Program (initiated in the CARES Act with additional funding added towards the end of April) and reopening across the United States. Continuing claims are still increasing, up another 500k to 22.8 million for the week ending May 2. Two important points: the pace of unemployment increase has been slowing, and continuing claims are posted with a week lag compared to initial claims. The coming week’s reports will be telling.

Lacking Mention of Negative Rates

Notably missing in the prepared remarks was a mention of the Fed taking the Fed Fund’s rate negative; however, it could not be avoided in the following discussion. When asked specifically about using negative rates as a future policy tool, Powell stated that the committee is focused on forward guidance and asset purchases as their tools and no Federal Open Market Committee participants currently view negative rates as an attractive monetary policy tool in the United States. The Fed Fund Futures market began signaling the potential for negative rates in early May, and as of this writing signal a 5% chance at negative Fed Funds rates by December 2020. While far from perfect, the futures market has been far more accurate than economists in predicting future Fed rate moves.


Matt Kelley is a Portfolio Strategy Manager with ESL Federal Credit Union. In his role, Matt oversees the portfolio strategy team at ESL and is responsible for the investment philosophy, approach, and overall performance of internal and external investment portfolios for ESL.

For additional content related to the economy from Matt, click here.