Interest Rate Outlook: Controversial May Employment Report

FOMC Meeting

The Federal Reserve’s Open Market Committee met last week and Chair Jerome Powell spelled out a bleak outlook for the U.S. economy. The Fed’s year-end median expectation for the unemployment rate is 9.3%, with 2020 GDP growth projected at negative 6.50% and core PCE inflation at 1.0%. At the press conference following the meeting, Powell said that “we are not even thinking about thinking about raising rates.” Fed officials project that the current fed funds rate of 0.00% to 0.25% will remain in place until at least the end of 2021 year and 15 of 17 committee members also expect the status quo to extend through 2022. The Federal Reserve will continue to maintain its asset purchase program “at least at the current pace” with an ongoing $80 billion per month allocated towards Treasury securities and $40 billion to mortgage backed securities.

90-Day T-Bill Rate

Source: Bloomberg

U.S. Economy in Recession

According to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), “a peak in monthly economic activity occurred in the U.S. in February 2020”, and they believe that the U.S. economy fell into recession in March. The announcement ended a 128-month run of economic expansion, the longest in the history of U.S. business cycles dating back to 1854. The committee also determined that the peak quarterly cycle ended in the fourth quarter of 2019.

Controversial May Employment Report

May’s Employment Report revealed an unexpected decline in the unemployment rate to 13.3% from 14.7% in April. The U.S. Bureau of Labor Statistics has disclosed that misclassification errors may have occurred and “the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis)”.

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