The Federal Reserve has announced that it is cutting the fed funds target rate 100bp to 0-0.25% with immediate effect on the basis that...

Fed Steps In: 100bp rate cut and US$700bn QE



The Federal Reserve has announced that it is cutting the fed funds target rate 100bp to 0-0.25% with immediate effect on the basis that Covid-19 is disrupting global economic activity and has significantly affected global financial condition. It has promised to keep rates there “until it is confident that the economy has weathered recent events”. We had expected such an outcome, but thought they would wait until the scheduled Wednesday time slot. However, with the news flow on the virus getting worse and the economic disruption set to intensify, the Fed clearly thought it prudent to get out ahead of the market open tomorrow. The supply crunch in manufacturing, the panic in the financial sector and the collapse in airline travel, hotel stays and leisure activities means we could see a quarterly contraction of the scale reached during the height of the financial crisis, especially with the prospect of some city lockdowns. We are pencilling in an 8% annualised 2Q20 GDP decline relative to the -4.4% figure experienced in 1Q09 and -8.4% in 4Q08.

The Fed has also announced it is formally restarting QE by promising to buy US$500bn of Treasuries and US$200bn of mortgage backed securities “over coming months”. We also expected then to restart QE, but anticipated that they would begin with around US$75bn per month. By giving a more general end-target they have more flexibility to front load or respond to any market dislocation as necessary.

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