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Will Interest Rates Test Negative for Coronavirus
With only three days until the scheduled FOMC meeting on March 17-18, The Fed decided it should not wait to lower a key interest rate. On Sunday afternoon, Federal Reserve Chairman Powell announced they’d now target a range of 0%-.25% on overnight Fed Funds. The cut is a full 1% drop by the Fed which had just lowered rates .50% two weeks earlier. Rate cuts in-between FOMC meetings are rare and considered aggressive. The reason expressed was reduced global and domestic economic activity brought on by actions taken to combat the threat of COVID-19.
To further help an economy that is slamming on the brakes, the Fed announced it would boost its holdings of U.S. Treasuries by at least $500 billion and its agency and mortgage-backed securities by at least $200 billion in the coming months. This signals a resumption of the U.S. Central Bank’s policy of quantitative easing.
During the announcement, Powell had this to say: “We do know that the virus will run its course and that the U.S.
economy will resume a normal level of activity. In the meantime, the Fed will
continue to use our tools to support the flow of credit.”
Considerations
After the Announcement:
-The Fed may be adopting the long-lost policy of adjusting monetary policy in-between FOMC meetings.
-With inflation running at 2.3% for the 12 months ending February 2020 and Treasury rates through 30 year maturities yielding less than 1%, real interest rates are now negative for savers. The bond markets may even push some maturities below zero.
-During the second quarter, M&A activity may heat up in this low rate, low valuation, comfortable balance sheet climate.
-Gold, which tends to trade higher during periods of uncertainty, has been rallying for weeks. This weeks rate cuts may push gold prices higher still as the strongest argument, historically, against holding gold over currency, is it doesn’t earn interest.
It appears the Fed is acting with all the resolve they did to battle the 2008 financial crisis. Sunday’s Fed announcement took place one day before leaders from the Group of Seven nations, including the U.S. President, have planned to discuss their pandemic response on a conference call. Below are the Central Banks within the G-7 that have already taken action on behalf of their economies.
News of economic stimulus, including securities purchases and lower rates, will be among top stories in the news Monday through Wednesdays as more official announcements and assessments are expected.
Suggested
Reading:
Gold’s Appeal is Driven by more than Coronavirus Fears
Does the Fed Have the Tools to Beat Forecasted Weakness?
The Economic Symptoms of Epidemics Have Been Felt Before
https://www.newyorkfed.org/markets/opolicy/operating_policy_200315