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Life as we know it changed in March, 2020. A new deadly coronavirus that originated in China quickly spread around the
"Remember, it only takes one crazy thing to change everything." - Dorothy Jaworski
Rates fell dramatically in 2019 and again in the first quarter of 2020, due to the emergency situation of the coronavirus and partial economic shutdown. The Fed Funds rate is back down to zero and the rest of the yield curve began to follow. I call it the "race to zero". The two-year Treasury yield is at 0.23% and the ten-year is 0.74%. With recession looming and a strong recovery projected but not certain, rates will remain low. Inflation never did make it to the Fed's target of 2% and is now declining, which is the typical recessionary response to companies' lack of pricing power (not to mention the plunge in oil proces). The risk now is that inflation falls down to zero or goes negative, to cause deflation. For manufacturers, capacity utilization is already low at 75% and will no doubt head lower. Finally, from a technical perspective, the velocity of money is already extremely low at 1.43, and it will head lower as we work to emerge from recession. The bottom line is that rates will remain very low for a long, long time.
Time to Reflect
We all have too much time on our hands. It is very hard to work at home and stay at home, too. In our lives, we haven't experienced a crisis like this. In my career, I've seen a lot of crises and we've overcome them all- hyperinflation of the late 1970s and early 1980s, the crash of October, 1987, the real estate crisis of the early 1990s, the Long Term Capital Management and first sub-prime crisis of 1998, the bursting tech bubble in 2000, September 11th, and the morgage, sub-prime, and financial crisis of 2008-09. This is clearly a new situation with a forced shutdown of the economy, which caused a selling panic, volatility, and a liquidity squeeze. One constant throughout has been the Federal Reserve, who stepped into each of these situations to calm and stabilize markets.
Dorothy Jaworski has worked at large and small banks for over 30 years; much of that time has been spent in investment portfolio management, risk management, and financial analysis. Dorothy has been with Penn Community Bank and its predecessor since November, 2004. She is the author of Just Another Good Soldier, and Honoring Stephen Jaworski, which details the 11th Infantry Regiment's WWII crossing of the Moselle River where her uncle, Pfc. Stephen W. Jaworski, gave his last full measure of devotion.