The US Federal Reserve, in another emergency move, cut interest rates by a full 100 basis points on Sunday, 15th March.
The central bank also announced a restart of its quantitative easing program.
According to the new QE, the Fed pledged to buy up to $700 billion in asset purchases which include Treasuries and mortgage-backed securities ($500bn of Treasuries and $200bn of mortgage-backed securities).
The central bank also cut the emergency lending rate at the discount window for financial institutions by 125 basis points to 0.25%. Additionally, it increased the length of the loans to a period of 90 days.
The move comes ahead of the Fed meeting due this week, though investors had been hoping that the rate cut would come during the FOMC meeting.
This is the second “emergency move” from the central bank in 2 weeks. The decision came as the Fed said that the financial markets were facing a heavy disruption.
The bank has also been under pressure from President Trump who has long been calling for lower interest rates.
Any More Surprises to Expect from the FOMC?
With most of the big decisions already made, the scheduled FOMC meeting is only likely to see the Fed trying to calm the markets. The meeting will be accompanied by the dot plot, as well as the quarterly rate projections.
Fed Chair Powell’s press conference is also likely to be used to explain the Fed’s stance to the markets.
The way things stand, it looks like that the Fed has already opened the taps for liquidity. However, it is a bit too early to tell.
Following the announcement on Sunday, equity futures initially reacted by selling. Dow futures fell sharply, triggering the limit down rules in the markets to halt trading temporarily.
At one point, the Fed’s balance sheet rose to $4.5 trillion by early 2015 which was projected to be about a quarter of the US GDP. However, since then, the Fed’s unwinding program brought the balance sheet down to $3.8 trillion. This is about 18% of the US GDP.
Thus, while the initial announcement of the Fed’s QE purchases seems a bit small, there is a lot of room for the Fed to ramp up its asset purchases.
One of the main reasons behind the Fed’s move is the increase in the number of people affected by COVID-19 in recent weeks.
Fresh data from China at the start of this week painted a grim picture.
Industrial production fell to the lowest levels ever, and expectations are for about 5 million people to lose their jobs.
Meanwhile, the United States can expect to see the extent of the disruption caused by the pandemic in a few weeks’ time.
What to Look for at the FOMC Meeting
Given that the Fed has already signaled its policy decisions, investors will be focusing on the economic projections. As of December 2019, the Fed had been looking at a GDP growth rate of 1% – 2%.
Thus, the prospects of a recession look dire at this point. Forecasts were for inflation to be around 1.8% – 1.9% for this year. Given how the situation evolves, it wouldn’t be surprising to see inflation overshooting the Fed’s target levels.
For the moment, the main focus will be on cushioning the blow from the pandemic.
While it is still early days, expect the Fed to continue to remain on the forefront of battling the crisis.