With the benefit of a little perspective, what should investors make of the Federal Reserve’s emergency cut in interest rates this week? Markets still seem uncertain. And it is easy to see why.
After an initial spurt of excitement, markets reacted badly to the US central bank suddenly trimming rates by half a percentage point on Tuesday, with one analyst noting it went down like “broken glass”. The S&P 500 tumbled another 2.8 per cent, and the 10-year Treasury yield slid below 1 per cent for the first time in history. That is hardly the reaction chair Jay Powell would have hoped for.
Investors had expected some kind of forceful action to counteract the economic impact of the coronavirus outbreak at the Fed’s scheduled meeting on March 18. Yet the decision to act outside that framework — and so soon after officials had appeared reluctant to take any rash action — sparked alarm for some. It raised the question: has the central bank identified a deeper, swifter deterioration than everyone else?
Moreover, the decision to cut rates unilaterally without co-ordinating with other central banks looked haphazard, and doing so reminded investors just how little firepower these banks have left, if any. Monetary policy is near maxed out in Japan and Europe, and even the Fed is just 1 per cent above zero. Perhaps more worryingly, the cut forced investors to recognise that despite the clamour for central banks to act, easier monetary policy is a poor antidote to a potential global pandemic.
Nonetheless, markets regained their footing on Wednesday — helped by the prospect of the moderate Joe Biden beating Bernie Sanders to the Democratic presidential nomination. And not everyone thinks the Fed was wrong to act with such alacrity.
Bob Michele, chief investment officer at JPMorgan Asset Management, said the emergency cut was “fair and appropriate” given the danger posed by coronavirus. “They were smart to move now rather than to attempt to keep all their powder dry and wait for things to escalate,” he said. “Their policy response removed one very big question to be answered in an environment where many more exist.”
More stimulus may be forthcoming, with markets anticipating the Fed trimming rates again at its regular meeting in a couple of weeks. Pimco, the giant bond house, believes that the central bank has another powerful weapon in its armoury: ending the reduction of a portfolio of mortgage-backed securities held since the financial crisis.
The Fed last year reversed its balance sheet shrinkage and began buying Treasury bills again, but the central bank’s MBS holdings continue to fall at about $20bn a month. Putting an end to this “would likely provide an economic jolt to the US consumer while simultaneously increasing savings rates”, Pimco said.
In other words, markets should not give up on central banks just yet.
@robinwigg
Source: Economy - ft.com
