Fed did its job, analysts say, but markets need more

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The Federal Open Market Committee lowered the fed funds rate target to between zero and ¼% in an emergency meeting on Sunday, but while analysts say the move was needed, they feel it will take more to offset the effects of COVID-19.

“The Fed did its job. Now it is up to members of Congress to do theirs,” said Diane Swonk, chief economist at Grant Thornton. “They have a very long way to go. We will need bailouts and cash in people’s hands to cover basic needs of food and shelter. The cost-benefit analysis on this is simple. If Congress fails, the recession will be deeper and the carnage it triggers will be longer. Pandemics have end dates; financial crises do not.”

Diane Swonk, chief economist at Grant Thornton
Diane Swonk, chief economist at Grant Thornton

The “unprecedented” Fed move, meeting on Sunday ahead of its planned Tuesday and Wednesday meeting left the market without a quarterly Summary of Economic Projections. But, she noted, “If rates are going to be zero for a long time, the forecast is irrelevant. Outliers on the Fed have also used the dot plot to make a point, which would have only muddied the waters of Fed communications at this critical stage of the crisis.”

Just as people have been hoarding food and other supplies, “companies and investors are hoarding cash,” said Bryce Doty, senior vice president and senior portfolio manager at Sit Fixed Income. "The spread of the virus in the U.S. and Europe is wreaking so much havoc that the Fed needed to step in to flood the financial system with cash.”

And while the Fed’s actions indicate the “enormity of the economic challenge,” Doty said, they “do little to address the spread of the virus.”

Until the spread of the disease is “dramatically” slowed, markets will not normalize. Actions including closing schools and businesses are “inevitable,” and “markets want it over and done with already,” he said.

“And until we do something more, nothing the Fed will do can completely stabilize financial markets," Doty noted.

Dec Mullarkey, managing director, investment strategy, at SLC Management, said, “The Fed’s emergency cut startled markets. Slashing rates to zero, ramping up bond buying, cutting bank reserve ratios and committing to making it cheaper for other central banks to borrow dollars is reminiscent of the urgent action during the financial crisis.”

“While reassuring that the Fed wants to attack the current crisis with all its policy might, the subtext that serious cracks and storm clouds are developing is not lost on markets,” he said.

“I find it interesting that they are replacing the previously scheduled Wednesday meeting,” said Jason Brady, president & CEO of Thornburg Investment Management. “I think this mostly signals that the Fed has done what it can do from a rate cut perspective. The additional bond buying is reasonable and has precedent, but mostly this underlines the lack of power the Fed has in the short term.”

While in some ways the moves “will be restorative to financial markets, in others, not so much,” he said. “The question of confidence in global markets may be couched in the context of equity prices rising in the near term. Quite foolishly, the Fed has tethered measures of their effectiveness to rising equity prices. It's a bad measure for both the Fed as well as for President Trump. However, with mortgage markets going sideways, and sub-optimal Treasury liquidity, the Fed is appropriately oxygenating financial markets.”

But despite the Fed action, a recession is inevitable, according to Nigel Green, the chief executive and founder of deVere Group. “Any way you look at it, it’s now almost certain that there will be a coronavirus-triggered recession as both global supply and demand are impacted.”

While it will be “deep,” Green said, it shouldn’t last long. “The slowdown will be temporary because it’s not caused by deep-rooted problems and imbalances in the economy, rather by a wholly unexpected shock that’s gripped the world.”

Edward Moya, senior market analyst at OANDA, said the Fed “failed to comfort markets as the impact of the virus is unknowable.”

It’s pledge to buy “at least $700 billion in assets will ultimately be positive for risky assets once we are beyond the virus, but that does not seem like it will happen anytime soon,” he said. “The Fed also pushed the focus back onto the government as a fiscal response is critical and needed soon.”

Sebastien Galy, senior macro strategist at Nordea Asset Management, said, “The market will see this initially as panic most likely, while eventually monetary policy proves effective. Most will speculate then on negative rates,” he said, although at a press conference Federal Reserve Board Chair Jerome Powell ruled out use of negative rates.

“We welcome the Fed’s move and expect this to continue at their next meeting while other central banks should follow to anticipate this sudden stop event,” Galy added. “As the disease spreads in the U.S. and we move to regionalized lockdowns, while restaurant activity already plummeted followed soon by housing, we would expect the regime of high volatility to remain. Having said this, we are going through the eye of the needle and the market should start to stabilize somewhat in over a week or so.”

Separately, the Empire State Manufacturing Survey showed activity in New York state contracted as the general business conditions plunged to negative 21.5 in March, its lowest level since 2009, from 12.9 in February.

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Coronavirus Monetary policy Federal Reserve FOMC Jerome Powell Manufacturing industry Federal Reserve Bank of New York