The US Fed last night for the second time in less than a month urgently reduced the rate and launched a quantitative easing program by $ 700 billion. The regulator intends to keep the rate near the zero level until it is convinced that “the economy has suffered the latest events and is striving for maximum employment and price stability” . What are the reasons for such unprecedented actions of the American regulator and what it means for the markets, economists explain.
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Head economist “VTB of capital ”in Russia and the CIS Alexander Isakov:
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Typically, the Fed conducts extensive consultations with representatives of the banking sector and industry when making decisions on rates, i.e., it takes into account data that are not yet reflected in current statistics. In this sense, the market relies on the following logic – an unexpected and significant decrease in the key rate suggests that the slowdown may be even more significant than the current consensus. Reducing the current money market rate is not always the most effective tool in normal conditions of non-zero rates, the main tool is managing expectations of enterprises and banks. In this sense, the market will wait for new forecasts on the rate of the Fed committee that voted almost unanimously.
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Chief Aton strategist Alexander Kudrin:
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The market was expecting new steps from the Fed, and in a sense, the regulator could not justify expectations. Coronavirus-related uncertainties have led to sales in recent weeks, and the flight of investors is a direct sign of a crisis of confidence in the financial system. Therefore, from the point of view of financial markets, lowering interest rates and providing liquidity is a way to restore this confidence. The question is whether monetary measures are enough to stop sales. Nevertheless, in overcoming the economic consequences of the coronavirus (namely, concern about the prospects for economic growth and led to outflows from the markets), the emphasis should be shifted to fiscal measures. On the other hand, the United States has already partially introduced such measures (a number of measures related to the introduction of an emergency on Friday, payment of sick leave to certain categories of citizens, oil purchases, etc.), but it will take time to evaluate their effectiveness.
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Investment DirectorSberbank asset management »Renat Malin:
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The Fed’s announcement of unprecedented measures is designed to reassure markets regarding possible problems in the banking system amid a sharp revaluation of stock indices. These measures cannot have an immediate stimulating effect on the economy, the problems of which are structural in nature, nevertheless, they are designed to smooth out the consequences for the economy in the medium term.
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Chief analyst of Nordea Bank Tatyana Evdokimova
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The Fed is trying to be proactive in conditions when markets have already expected a rate cut by 100 basis points. The regulator is trying to prevent the current recession in the markets from developing into a full-blown liquidity crisis and defaults of loaned companies. Unfortunately, even such a sharp decrease in the rate is unlikely to prevent a recession in the American economy in the second, and possibly in the third quarter, given that cheap money is not able to compensate for the current drop in demand caused by the expansion of quarantine. At the same time, an emergency reduction in rates in developed countries to stabilize the situation is not entirely applicable in emerging markets, where similar measures may aggravate capital outflows.
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Chief AnalystBCS premiere “Anton Pokatovich:
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Even such proactive monetary support measures can be absorbed by market negativity associated with future uncertainty. Given such aggressive and unexpected steps from the Fed in the current conditions, some market participants may perceive as another signal in favor of the large-scale destructive effect of the virus on world economic growth. These fears of investors are beginning to be confirmed by statistics – macroeconomic indicators in China in January – February showed a huge decline (industrial production – 13.5%, retail trade – 20.5%, investment – 24.5%). These statistics are probably also in favor of a very restrained market reaction to the Fed’s softness. The effectiveness of monetary softness measures can be very limited in terms of supporting markets in the fight against viral pressure. In the future, the scale of monetary support is likely to increase. We believe that the “quantitative easing” from the current repurchase volume of $ 700 billion will expand. Also, we can not exclude the passage of rates in the USA to the negative zone in the event of a large-scale spread of the disease in the States.
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In the future, we also expect strengthening and fiscal support measures in the form of various direct subsidies, tax breaks and vacations, etc. In the near future, markets may remain in the process of searching for the bottom, in other words, the decline may continue. With a decrease in oil prices to levels of $ 30 / barrel. and below the ruble will weaken to 75–77 rubles / $.
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General Director of Sputnik – Money Management Management Company Alexander Losev:
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The spread of coronavirus has become both an economic and a political problem for the United States. The largest market collapse since 1987, problems with refinancing corporate debts, blocking the supply of equipment from China and breaking the production and logistics chains of Silicon Valley corporations, problems in the aviation industry, possible job losses due to quarantine, etc. – All this poses a serious threat to the election for President Donald Trump. Now Trump seized the initiative from the Democrats and forced the Fed to take emergency measures, which are used only in a crisis, because the political future is at stake. Formally, the Fed’s measures have been taken as there is growing evidence that the US economy has been hit hard by the virus. But the main problem is different. The imbalance of the world economy and huge debts have not gone away. Such emergency measures will only mask the problems for a while. But when the time comes to deal with the real world crisis, then most of the measures and tools will already be used and this will only strengthen future problems.
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Chief Economist of Gazprombank Sergey Konygin:
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The Fed’s decision was dictated by a potential serious slowdown in the economy, primarily in the service sector. As the February data for China showed, the negative effect of coronovirus turned out to be much worse than expected. The proactive actions of the regulator can mitigate the negative consequences for the economy, but the effectiveness of measures is limited by the non-monetary component of the crisis.
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Head of the dealing center of Metallinvestbank Sergey Romanchuk:
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The Fed turned out to be a hostage to the situation, and investors and local politicians expected a rate cut from it (however, at a scheduled meeting on March 18). The fact that the Fed did not even begin to wait for Wednesday indicates a bewilderment of the regulator and strengthens negative sentiment in the markets.
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Lower rates and measures to support liquidity are really necessary in order to avoid the collapse of the financial system and not add fuel to the fire. The problem is that the Fed, due to such colossal measures, almost left no room for maneuver for the future, and the effect of them is very short and other news can easily outweigh it: Asian, European and Russian markets are already falling today, like S&P futures 500, after the publication of macroeconomic statistics for China, where only retail sales in January – February fell by 20.5% year-on-year. Judging by the pace of the spread of the virus outside of China, one can expect an equally strong drop by tens of percent in other countries, and this can’t be cured by monetary incentives. So, most likely, we will see mass sales more than once. Under these conditions, you must first deal with health care and stop the spread of the virus – without this, liquidity and low rates will not help.
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Sberbank strategist on currency and interest rate markets Yuri Popov:
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Such emergency measures are associated with the ongoing epidemic of coronavirus. Over the weekend, its spread accelerated; according to WHO, over the past day the number of cases has increased by a record 11,000. In these conditions, countries declare a state of emergency and close their borders. It is likely that the epidemic will lead to a very sharp drop in economic activity and will cause a recession in many countries, as happened in China. Under these conditions, markets are falling this morning, despite the urgent actions of the US Federal Reserve, which has exhausted traditional measures to combat the crisis. Therefore, in the current environment, fiscal measures will have a decisive effect on the economy and markets.
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To further support the economy, the Fed could theoretically begin to buy back the securities of the non-financial sector, however, at the moment, such measures are prohibited by the Federal Reserve Act. Nevertheless, if the US Congress amends this law and the US Treasury guarantees that it will cover the Fed’s losses on such operations, it can proceed with them. But, most likely, this will not happen in the near future. Also, the US Federal Reserve could hypothetically switch to negative interest rates, but given the ambiguous impact of such measures on the economy, we also do not assume that this is possible in the near future.
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Director of the financial center Skolkovo-NES Oleg Shibanov:
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On the one hand, this is support for potential lending, and in this sense, everything is correct. But how should markets and businesses take two extraordinary declines, with the second immediately at 1%? Probably as a signal of huge expected problems. In this regard, the time and size of the decline are not completely obvious. But since the Fed has calculated a big risk, it’s better to react immediately.
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