The coronavirus recession is almost over, Wall Street strategists say

Wall Street Coronavirus
New York Stock Exchange.

  • Wall Street strategists are increasingly optimistic that the pandemic is in its final phase.
  • JPMorgan said in February the crisis will “effectively end” in 40 to 70 days.
  • The “recession is effectively over,” Morgan Stanley said Sunday.
  • Visit the Business section of Insider for more stories.

One year after the S&P 500 tumbled nearly 8% on COVID-19 fears, experts on Wall Street see the US bearing down on the finish line of the pandemic.

Declining case counts, vaccine rollouts, and expectations for new stimulus have lifted spirits in recent weeks. Economists have upgraded growth forecasts and investors continue to shift cash from defensive investments to riskier assets more likely to outperform during a rebound. Major banks’ strategists are taking it one step further.

The rapidly improving backdrop and “spectacular” profit growth in the fourth quarter signal “the recession is effectively over,” Michael Wilson, chief investment officer at Morgan Stanley, said Sunday.

“At the current pace of vaccinations and with spring weather right around the corner, several health experts are talking about herd immunity by April,” he said in a note. “It’s hard not to imagine an economy that’s on fire later this year.”

JPMorgan made a similarly bullish claim late last month, telling clients it doesn’t expect new COVID-19 strains to dent its positive outlook. The spread of new variants is still overshadowed by the broader decline in cases, the team led by Marko Kolanovic, chief global markets strategist at JPMorgan, said.

The rate of vaccination implies the pandemic will “effectively end” in the next 40 to 70 days, they added.

To be sure, there’s plenty of progress to make before the pandemic is no longer a public health threat. The US reported 98,513 new COVID-19 cases on Monday, lifting the seven-day moving average to 64,722, according to The New York Times.

And while the country is averaging 2.17 million vaccine administrations per day, reaching herd immunity at the current rate would still take roughly six months, according to Bloomberg data, which gauges how quickly the US can vaccinate 75% of its population.

Herd immunity is widely considered the most effective way to defeat COVID-19. Yet Wall Street’s more bullish forecasts suggest a mix of vaccinations and continued precautions could crush the virus in a matter of weeks.

Officials have warned that, while accelerated growth is on the horizon, there’s work to be done before the US stages a complete recovery. Reopening and new stimulus may fuel a sharp increase in inflation, but such a jump will likely be short-lived and fail to meet the Federal Reserve’s target, Fed chair Jerome Powell said Thursday.

The labor market also has “a lot of ground to cover” before reaching the central bank’s goal of maximum employment, Powell added. The chair indicated that, along with a lower unemployment rate, the Fed would need to see improved wage growth and labor-force participation before tightening ultra-easy monetary conditions.

Others are more optimistic. Treasury Secretary Janet Yellen said Monday that the $1.9 stimulus package nearing a final House vote can “fuel a very strong economic recovery.”

“I’m anticipating, if all goes well, that our economy will be back to full employment – where we were before the pandemic – next year,” Yellen said in an interview with MSNBC.

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The US could return to full employment in 2022 due to stimulus boost, Yellen says

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Treasury Secretary Janet Yellen.

  • The US could reach full employment in 2022 thanks to Democrats’ stimulus plan, Sec. Yellen said.
  • The relief package can “really fuel a very strong economic recovery,” Yellen told MSNBC.
  • Yellen also dispelled concerns of the $1.9 trillion package sparking rampant inflation.
  • Visit the Business section of Insider for more stories.

One of the slowest-recovering sections of the US economy can return to pre-pandemic health as early as next year, Treasury Secretary Janet Yellen said Monday.

That would be the labor market.

While business output and retail sales have all trended higher in recent weeks, job growth continues to lag behind the overall recovery. Friday’s jobs report, while stronger than expected, still shows roughly 10 million Americans out of work. Weekly jobless claims remain at elevated levels. And the “real” unemployment rate, which measures people who have stopped looking for work, stands at around 9% after Friday.

Yellen sees the stimulus changing that, telling MSNBC that the $1.9 trillion stimulus plan moving through Congress will play a critical role in boosting demand and reinvigorating job creation.

“We expect the resources [in the bill] to really fuel a very strong economic recovery,” Yellen said. “I’m anticipating, if all goes well, that our economy will be back to full employment – where we were before the pandemic – next year.”

Senate Democrats approved the new relief package on Saturday, and the House is expected to vote on the last version before President Joe Biden signs it on Tuesday. Biden is overwhelmingly likely to be able to sign it into law before expanded unemployment benefits expire on March 14.

To be sure, “full employment” is different from the “maximum employment” target sought by the Federal Reserve. The central bank has indicated it won’t rein in its ultra-easy monetary policy until wage growth improves and the unemployment rates for minorities and low-income groups fall.

Yellen also dispelled concerns that inflation would run rampant as new stimulus hits households. Direct payments and the unemployment-insurance supplement included in the measure are likely to lift consumer spending and, in turn, lead businesses to raise prices. Republicans have argued the relief plan will lead the economy to overheat, but the Treasury Secretary isn’t concerned.

“I really don’t think that is going to happen,” Yellen said.”We had a 3.5% unemployment rate before the pandemic and there was no sign of inflation increasing.”

The comments come as Treasury yields hover at their highest levels since February 2020. Expectations for strong growth and higher inflation have led investors to dump government bonds and shift cash to sectors best positioned to thrive through the economic recovery.

The rapid leap in Treasury yields jostled markets and caught the Fed’s attention. Central bank officials have so far only made soft comments regarding the sell-off, but some on Wall Street are preparing for the Fed to further clarify its inflation expectations when policymakers meet on March 17.

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Joe Biden can help remake the Federal Reserve so that it actually helps America’s workers

joe biden
President-elect Joe Biden

  • The Federal Reserve is finally starting to take the concerns of average workers more seriously in its monetary policymaking.
  • In order to cement this commitment to workers and full employment, President-elect Joe Biden should nominate Fed Board members with a background in organized labor.
  • There have been a vanishingly small number of labor leaders at the Fed over its long history, this needs to change.
  • Kaleb Nygaard is a graduate student at Yale’s School of Management studying Systemic Risk. He is the Editor in Chief of the central banking education website Centralverse and the host of The Bankster Podcast.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit Business Insider’s homepage for more stories.

It’s time for someone to truly represent the voice of workers at the Federal Reserve.

The health and economic one-two-punch of COVID-19 has had a particularly devastating effect on working-class families. It has also made it clear that policymakers need to focus their efforts on helping those families. 

Despite this, not a single person with a background in organized labor has had a vote on the Federal Reserve’s all-important Open Markets Committee (FOMC), past or present. Since it was formalized in the 1930s Banking Acts, there have been 179 people who have served on the committee. 

Adding someone with a background in labor to the leadership of the Fed would help ensure these working-class families have representation at the most important macroeconomic decision-making-table in the country. 

To repeat, not a single one has had a background in Labor. 

In January, President Biden should change that.

A seat at the table and a voice at the Fed

There are two types of participants on the FOMC: seven Governors who work from the Fed office in Washington DC and 12 Presidents who head the Reserve Banks spread across the country. How they are chosen and who does the choosing is very different for the two types. 

The seven Governors are nominated by the US President and confirmed by the Senate in the same fashion that Cabinet Secretaries or Supreme Court Justices are chosen. 

By law, the Governors are supposed to consist of “a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country”. 

One of the seven seats sits empty at the moment. On day one, President Biden should nominate someone with a background in labor to fill the seat, and whichever party controls the Senate should confirm the nominee. 

The selection process for the 12 Presidents is more complicated. Each Reserve Bank is overseen by a nine-member Board of Directors. Three are bankers, elected by banks in the area. Three are non-bankers, elected by banks in the area. And three are non-bankers, appointed by the seven Governors in Washington DC. The six non-bankers are the ones responsible for choosing the Reserve Bank President. 

By law, the non-banker-directors are supposed to consist of “the interests of agriculture, commerce, industry, services, labor, and consumers.” So although the process is more complicated and less democratic for the selection process of the Reserve Bank Presidents, the legal foundation upon which it sits explicitly includes Labor representation.

In the full 106-year history of the Fed, only 45 representatives of labor have been on the Board of Directors of the 12 Reserve Banks. 

Chart 1

And when you look at it as a percentage of the non-banker directors, the lack of labor representation is even more paltry.

Chart 2

Less than 20% of the labor representatives were elected by banks. The remaining 80% plus were appointed by the Governors in Washington DC. The total per district also varies greatly. The Federal Reserve Bank of New York has had the most with nine, and the Federal Reserve Bank of Atlanta has not had a single one. 

Chart 3

In August, the Fed announced the conclusion of their first-ever-public framework review. There were many changes made because of the review, but the overall thrust of the changes was to give greater attention to improving the employment situation of average Americans, with the greatest impact of the changes going to working-class families. 

This focus on the labor market and working families even showed up in 2019, when the Fed made a sharp turnaround and reversed the interest rate increases they had made in the previous few years. They admitted they’d missed the mark on full employment. As Chairman Jay Powell said at the time: “We really have learned that the economy can sustain much lower unemployment than we originally thought without troubling levels of inflation”.

To confirm the spirit of both the Fed’s 2019 admission of misreading the employment situation and the 2020 policy changes, President Biden should nominate someone with a background in labor to fill the empty Governor seat. Going forward, this would ensure that the voices of the tens of millions of working-class families who are struggling through the effects of the pandemic, are heard in the decision-making room of our country’s central bank.

For the same reasons, the Reserve Bank Board of Directors should consider candidates with a background in Labor for future Reserve Bank President positions. 

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