Chief Investment Strategist and Chief Economist
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The Fed and other central banks aim to mitigate the economic effects of the coronavirus. We consider implications for financial markets.
In an acknowledgement of the building economic shock from the coronavirus, the Federal Reserve cut its target policy rate 50 basis points at an unscheduled meeting on 3 March 2020. Further action is likely. (This followed rate cuts by 25 other central banks during the course of 2020, including two acting overnight). G-7 finance ministers in a statement earlier today said they would “use all appropriate policy tools” to safeguard growth.
We see macro policy, particularly fiscal “disaster relief” as a constructive, important element to prevent lasting damage from an exogenous, global health shock. Easier monetary policy has little immediate economic impact, but it does lower “hurdles” for risk taking activity. It should also encourage governments to take bolder, ideally temporary fiscal measures. Importantly for global markets, given a high Fed funds rate compared to global yields, failing to cut interest rates might have attracted disruptively strong inflows into safe-haven USD assets. This could have risked further tightening financial conditions.
As the Fed is likely to unwind emergency easing measures much more slowly than it acts, rate cut(s) will help strengthen eventual recovery. Notably, however, US equities have declined in four of seven cases in the week that has followed emergency Fed rate cuts. The same may now occur. However, the context for the majority of past emergency rate cuts has historically been significantly more negative than we see in the current situation.
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