The Fed broke out its crisis playbook: Morning Brief

Monday, March 16, 2020

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Zero rates, quantitative easing, and a signal to lawmakers

The Federal Reserve stunned markets on Sunday night.

In a shock statement posted at 5:00 p.m. ET, the Fed announced its second emergency rate cut in as many weeks and a new quantitative easing program.

The Fed is now clearly on crisis footing. The central bank’s actions on Sunday night send a clear signal to financial institutions around the globe: lend.

In this period of growing economic and public distress, the Fed wants to make clear the broader economic and public health response will not be hamstrung by a lack of liquidity in the banking system.

“While the primary response to this challenge will come from our health care providers and policy experts, economic policymakers must do what we can to ease hardship caused by the disruptions to the economy and to support a swift return to normal once they have passed,” Fed chair Jerome Powell said in a teleconference on Sunday evening.

The target range for the Fed’s benchmark interest rate now stands at 0%-0.25% for the first time since 2015 and this move is the Fed’s first cut to zero since December 2008.

Additionally, the Fed will purchase at least $700 billion worth of assets in a new quantitative easing program, comprised of at least $500 billion worth of Treasuries and $200 billion worth of agency mortgage-backed securities by at least $200 billion purchased “over the coming months.”

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed said in a statement Sunday night.

“Global financial conditions have also been significantly affected… The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Writing Sunday night, Paul Ashworth at Capital Economics said “we have the entire crisis playbook enacted before Asian markets open — with the Fed doing everything in its power, not just to support economic activity, but to keep the financial system afloat and keep credit flowing to affected households and businesses.”

The Fed, along with The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, also announced a coordinated move to lower the price on dollar liquidity swap lines by 25 basis points, a move aimed at assuring investors there will be dollars available to any institution that needs them.

Federal Reserve Chair Jerome Powell. (AP)
Federal Reserve Chair Jerome Powell. (AP)

In a separate announcement, the Fed cut the rate at its discount window to 25 basis points, cut reserve requirement ratios at banks to 0% as of March 26, encouraged banks to use the Fed’s intraday credit lending facility, and encouraged banks to use their liquidity buffers to lend to businesses and households.

As Bespoke Investment Group strategist George Pearkes noted Sunday night, “This is really shock-and-awe.”

And the Fed’s actions, of course, do not come in isolation.

“We think the Fed has acted now to try to get ahead of what likely will be terrible news on the spread of the virus, both inside and outside the U.S., over the next couple of weeks,” said Ian Shepherdson,
chief economist at Pantheon Macroeconomics.

“The lesson of Hubei and Korea is that lockdowns and social distancing measures take two or three weeks to bring about a clear downshift in case trajectory, with deaths then following.”

Markets are now anticipating drastic fiscal measures both in the U.S. and abroad. Late Friday, the House passed a measure that increased paid sick leave and unemployment benefits, though as of Sunday afternoon the Senate had not yet scheduled a vote on the bill.

Following the Fed’s announcement Sunday night, stock futures went limit down within a half hour. The message from investors at this stage appears clear: it is time for governments to open up their coffers.

Limiting the economic fallout from the coronavirus will require action more than just loose monetary policy and reassurances from global central banks. As Powell said Sunday during a conference call, fiscal responses to the coronavirus-related economic slowdown are “critical.”

And the Fed’s message to lawmakers and investors is now crystal clear — we will not show restraint.

One hopes Congress won’t either.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him at @MylesUdland

What to watch today


  • 8:30 a.m. ET: Empire Manufacturing, March (4.9 expected, 12.9 in February)

  • 4 p.m. ET: Net long-term TIC flows, January ($85.6 billion in December)


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