It does not, indeed. Making too much money may even bring us more problems like liquidity trap, as I have mentioned many times before.
FED Chair Powell attended a webinar held in Washington on Wednesday. Stressing that patience is a virtue, Powell said the Fed does not expect economy will improve quickly enough and added, “The passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery”. As far as I understand from his message, Powell implies that the Fed is providing additional fiscal support but this doesn’t mean that the economy will improve rapidly.
Bonds appreciated while stock markets gave back strong gains right after Powell’s speech transcript was released, which means investors continue to invest in dollar or in dollar-denominated assets. The fact that the parity was in decline lately also supports my argument.
In his speech, Powell mentioned a Fed study published yesterday, showing around 40% of Americans earning less than $US40.000 a year lost a job in March 2020. Just like Powell, IMF Managing Director too has recently made quite negative comments regarding the future of global economy.
“Negative interest rates won’t work…”
Adding, “The loss of thousands of small- and medium-sized businesses across the country would destroy the life’s work and family legacy of many business and community leaders and limit the strength of the recovery when it comes”, Chair Jerome Powell emphasized that long stretches of unemployment can damage or end professionals’ careers as their skills lose value and networks dry up.
Fed Chair killed certain expectations, clarifying that negative interest rates will not actually work as there were rumours around the markets for about a week now that the Fed may use negative interest rates to fight the coronavirus recession. Making it very clear that the Fed will not resort to negative rates in the short term, he did not give any clue about a possible long-term negative interest rate usage. Obviously, these words were Powel’s response to Trump’s support for negative interest rates as he recently tweeted: “The Federal Reserve should get our interest rates down to zero, or less, and we should then start to refinance our debt.”
In short, it can be clearly seen that Powell and his team keep on doing what they do regardless what market actors or political leaders say. If you ask me, the Federal Reserve spares no effort to support the U.S. economy. Hopefully, Powell’s negative scenario will not become a reality and the world economy will overcome this financial bottleneck by the end of the year.
