After attempting to hold onto fresh highs in the S&P 500, stocks tumbled following the FOMC Minutes released on Wednesday, which revealed the Fed still had serious concerns about the effect of the coronavirus on the economy and suggested rates could remain unchanged for the time being.
While the Fed Minutes acknowledged some improvement in the economy, the release noted that GDP had fallen, and only modest gains were made in the labor market.
“Measured on a quarterly basis, however, it appeared that real gross domestic product (GDP) had decreased at a historically rapid rate in the second quarter. Labor market conditions improved considerably in June, but the improvements over May and June were modest relative to the substantial deterioration seen in March and April. Consumer price inflation—as measured by the 12-month percentage change in the price index for personal consumption expenditures (PCE) through May—remained well below the rates that prevailed early in the year,” the statement said. The Fed went on to mention that the coronavirus was also still causing a significant amount of economic uncertainty.
“Participants noted that the coronavirus pandemic was causing tremendous human and economic hardship across the United States and around the world. Following sharp declines, economic activity and employment had picked up somewhat in recent months but remained well below levels at the beginning of the year. Weaker demand and significantly lower oil prices were holding down consumer price inflation. Overall financial conditions had improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses. Participants agreed that the path of the economy would depend on the course of the virus, which was seen as highly uncertain,” the release continued.
As a result of the ongoing uncertainty, the release discussed that rates could remain steady as the Fed continues to assess the fallout from economic Covid-19.
“They noted that the path of the economy would depend significantly on the course of the virus and that the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term. In light of this assessment, all participants considered it appropriate to maintain the target range for the federal funds rate at 0 to 1⁄4 percent. Furthermore, participants continued to judge that it would be appropriate to maintain this target range until they were confident that the economy had weathered recent events and was on track to achieve the Committee’s maximum employment and price stability goals,” the report stated.
The report also mentioned that the Federal Reserve may continue to purchase Treasurys and MBS’s.
“Participants also judged that, in order to continue to support the flow of credit to households and businesses, it would be appropriate over coming months for the Federal Reserve to increase its holdings of Treasury securities and agency residential mortgage-backed securities (RMBS) and CMBS at least at the current pace,” the release added.
Investors and traders appeared displeased by the news, as stocks tumbled shortly after the release Wednesday. The SPDR Dow Jones Industrial Average ETF (DIA), SPDR S&P 500 ETF Trust (SPY), which were showing moderate gains, quickly traded lower to express losses, while the Invesco QQQ Trust (QQQ) continued its slide.
For more market trends, visit ETF Trends.