Fed’s Bullard Warns Unemployment May Soar To 30%, GDP Crash 50% In Q2

Last Friday, when Goldman predicted a 24% drop in Q2 GDP ostensibly in response to JPM’s own -14% downgrade to Q2, we were frankly shocked, and wondered who would have the guts to come out with an even more apocalyptic prediction. Well, just 48 hours later, none other than the Fed’s James Bullard has literally swept the analyst field with a forecast that – if accurate – could mean nothing short of civil war for the US.

In an interview with Bloomberg, the president of the St. Louis Fed, predicted that U.S. unemployment rate may hit 30% in the second quarter because of shutdowns to combat the coronavirus, coupled with an unprecedented 50% drop in US GDP. That would be an outcome worse not only than every prior war the US has (officially) waged, but more than twice as dire as the worst days of the Great Depression.

So what should happen for this catastrophic outcome to be avoided? While Bullard, one of the biggest Fed doves, said that the Fed is ready to do anthing, he appeared to punt to the US government, hinting that it is now up to Congress to offset the nearly $3 trillion in loast income.

Bullard called for a powerful fiscal response to replace the $2.5 trillion in lost income that quarter to ensure a strong eventual U.S. recovery, adding the Fed would be poised to do more to ensure markets function during a period of high volatility.

“Everything is on the table” for the Fed as far as additional lending programs, Bullard said in a telephone interview Sunday from St. Louis. “There is more that we can do if necessary” with existing emergency authority. “There is probably much more in the months ahead depending on where Congress wants to go.”

As Bloomberg notes, Bullard’s grave assessment “underscores the critical need for Congress and the White House to quickly find agreement on a massive aid program” especially  after the Fed restarted financial crisis-era programs to help the commercial paper and money markets, after cutting interest rates to near zero and pledging to boost its holdings of Treasuries by at least $500 billion and of mortgage securities by at least $200 billion.

“This is a planned, organized partial shutdown of the U.S. economy in the second quarter,” Bullard said. “The overall goal is to keep everyone, households and businesses, whole” with government support. “It is a huge shock and we are trying to cope with it and keep it under control.”

While this hardly needs to be spelled out, but 30% unemployment – or 50 million Americans out of a job – basically means society begins to disintegrate as this would be a world that nobody can possibly fathom.

Besides the obvious, there are two additional problems here: first, the Fed’s massive response has failed to stimulate risk appetite or to ease the massive dollar short squeeze which has sent the Bloomberg Dollar index to all time highs, sparking debate whether the Fed’s credibility is now gone as the world awaits helicopter money, and two, and perhaps far more ominous, is that as of this moment the US is reliving the darkest moment of the financial crisis – when Congress failed to pass the first TARP iteration, sending the market crashing. Indeed, as we reported earlier and as Bloomberg just confirmed…

• PELOSI: BIG DIFFERENCE BETWEEN WHAT DEMOCRATS, REPUBLICANS WANT

…  there appears to be a huge discrepancy between what Republicans and Democrats will agree on, with the former demanding a massive, no-holds-barred bailout of big corporations, while the latter seeking billions in traditionally progressive projects.

So far the two have not found a middle ground, and as we near the moment futures are set to open at 6pm ET and traders start having flashbacks to Sept 29, 2008 when Congress rejected the original TARP proposal, absent a Congressional agreement on a massive fiscal stimulus, all hell may be about to break loose, and futures may suffer their first ever 3rd level circuit breaker tomorrow (triggered at -20%) if Republicans and Democrats fail to find an agreement.