The new steps announced by US Federal Reserve yesterday are comprehensive set of measures, but they alone will not suffice given the challenges the economy is currently facing, says a report.

 

The Federal Reserve held its second extraordinary meeting this month, and announced a series of measures in response to the coronavirus epidemic. These include cutting its key benchmark rate to 0%, resuming asset purchases of at least $700 billion, and reducing the cost of bank funding via its discount window facility as well as that of offshore USD funding through USD swap lines.

 

This is the latest – and possibly not the last – step by the Fed in its efforts to ease financial conditions while markets are facing severe stress, to provide confidence that policy is taking appropriate support measures, and to establish the right conditions for a recovery once the coronavirus epidemic starts to abate, said Bill Papadakis, Macro strategist, Banque Lombard Odier & Cie SA, in the Investment Strategy Bulletin.

 

"The announcement offers a comprehensive set of measures, even if they alone will not suffice given the challenges the economy is currently facing. Targeted fiscal measures that offer more immediate support to the affected sectors is a key part of the response we are looking for; more crucially, we are seeking a public health policy that helps contain the spread of the virus and buys time to avoid cases overwhelming hospital capacity," the bulletin says.

 

Bringing forward its meeting scheduled for later this week, the Fed chose to make its new set of announcements before markets opened. Given recent developments, a new and aggressive move was widely expected as keeping interest rates above zero at this point made little sense, especially in a context of renewed asset purchases. In reducing the target range for fed funds to 0-0.25%, the Fed has essentially reached its effective lower bound, as it seems unwilling to consider negative rates.

 

The Fed will now purchase at least $500 billion of Treasuries and $200 billion of MBS, with immediate effect (purchases starting today, March 16). 

 

In a coordinated announcement with other major advanced-economy central banks (ECB, BoE, BoJ, SNB, BoC), the Fed also announced cheaper access to US dollars through USD swap lines, which had proven to be a critical policy response during the global financial crisis. The coordinated announcement reduced the cost to just 25 bps over the overnight index swap rate, and expanded the swap lines’ availability from one-week maturity to four-month operations.

 

"While negative news flow - which is likely to continue for several days as new cases continue to rise around the world- will make for a challenging environment, we note that we are seeing signs of policy response moving in the right direction. We will continue to monitor closely developments on both the course of the epidemic and the policy measures taken in response to it," says Papadakis. - TradeArabia News Service