Fed Shoots Down Notion of a V-Shaped Recovery

In updating its projections for growth and unemployment on Wednesday, the Federal Reserve poured cold water on the notion that last week’s surprise jobs report signaled a sharp V-shaped recovery for the U.S. economy. In extending the timing and some of the scope of its notably dovish monetary policy signaling, the central bank also reinforced the deeply embedded market assumption that investors are well protected if they remain under the Fed’s policy umbrella. However, it left two questions open that are important for the future of the U.S. and global economies: How protected are assets on the periphery of the umbrella, and what does the notable disconnect between asset prices and the real economy mean for longer-term well-being?

The Fed’s latest economic forecasts suggest a 6.5% contraction in gross domestic product in 2020 that would take two years to reverse. The projection for the unemployment rate was also downbeat, with a 9.3% unemployment rate at the end of the year, or more than twice the level before the economic shock caused by the Covid-19 outbreak. With that, and with no fear of inflationary pressures anytime soon, the Fed extended its ultra-low (essentially zero) interest rate policy guidance through 2022 and signaled that it would stop what has been a slight tapering of some of its asset purchases in the last few weeks.