Warning issued by the Fed's chair (Afternoon analysis 13.05.2020)

Market sentiment is deteriorating and the Polish currency, although it does not record significant changes, starts to feel supply pressure. Jerome Powell foresees significant risks for the economy and provides heartbreaking data: in March almost 40% of Americans from households earning less than 40,000 USD a year lost their jobs.

The event of the day was the speech of the Federal Reserve Chair, Jerome Powell, during a teleconference organised by the Peterson Institute. As expected, the US economic picture presented by the Fed head was not optimistic.

For the time being, the Fed is not considering negative interest rates

Jerome Powell admitted that the decline in economic activity has been the worst since World War II. Still, on the other hand, the decline is exceptional (due to the virus) and without contemporary comparison. The prospects for the economy, in turn, are subject to a great deal of uncertainty, and the risk of a negative scenario is very high. According to Powell, the coronavirus pandemic also carries a risk of long-term damage to the economy and a larger fiscal stimulus package may be needed - the situation may be worth the costs that will have to be paid in the future to reduce this risk.

Recently, practically before every speech given by Jerome Powell, there have been speculations as to whether or not he will refer to negative interest rates. This question was also asked today at the conference and Powell stated that the Federal Reserve is not taking into account negative interest rates (as a potential solution). He also added that the evidence of the effectiveness of negative rates is "highly mixed". The Fed's position on negative interest rates is, of course, in opposition to the ECB and the eurozone, where these rates have been negative for a long time, or even to the statements of the head of the Bank of England, who has not ruled it out.

Powell also quoted data from the US Household Report, which will be published tomorrow. Nearly 40% of Americans in households with less than 40,000 USD a year lost their jobs in March. This is another indication of the extent to which the pandemic has affected the economy, which is likely to be negatively affected in the coming months, if not years.

This is also another proof of how unevenly the closure of economies has affected social inequalities. As a reminder: Friday's labour market report indicated that unemployment increased the most among the least educated (over 20%), and the average hourly wage rose by over 7% (because those who earned the least lost their jobs). Data from the US labour market may also be characteristic for other countries.

Although the market is currently relatively calm, the fact that the largest central bank of the largest economy does not publish economic projections and de facto does not know what the recovery path may look like, puts the second part of this year as well as the following year under the sign of great uncertainty.

Slightly larger fluctuations, the dollar somewhat stronger

After the initial weakening of the EUR/USD quotations during Powell's statement, they rose to nearly 1.09, and the dollar gradually started to pare losses. If we refer to yesterday's closing, these are still minimal changes (a decrease of 0.05% - about 5 p.m.). However, combined with the deterioration of sentiment on the broader market (declines in equities and increased demand for bonds in the afternoon), the zloty begins to experience increased supply pressure.

The zloty’s quotations in relation to the dollar, the euro or the franc are still in a limited fluctuation range, but this is close to the low levels of early April. Further deterioration of sentiment on the broader market may support this despite the gradual opening of economies, making the zloty weaker in the coming days or weeks. In a slightly longer perspective - months or another year - if we do not observe a second, strong wave of illnesses (and re-closure of economies), the currencies of emerging countries, including the zloty, should cope relatively better than their counterparts from developed countries.