Cutting interest rates to a target range of 0 to 0.25 per cent and announcing a return to quantitative easing – $700bn worth of asset purchases – on Sunday evening, the United States Federal Reserve signalled it will take all steps necessary to support financial markets. The intervention outside market hours unnerved investors, with the US S&P 500 losing almost 12 per cent on Monday. Although there was a six per cent upswing on Tuesday, as President Trump sought $850bn of fiscal measures, policy makers are struggling to control the narrative in the fight against coronavirus.
The previous emergency cut in interest rates on 3 March happened after a Dow Jones rally - but was precursor to market falls – and David Roberts, head of the Liontrust Global Fixed Income team, thinks releasing drastic policy when equities are in an upswing sends the wrong signals: “This is twice that recovering markets have been spooked by emergency policy, “what do they know that we don’t” responses from the US Central Bank.”
Fighting the economic impact of coronavirus is not a job for monetary policy alone and while one interpretation of Fed Chair Jerome Powell’s actions is he aimed to jolt the US government into drastic fiscal policy (government spending and tax cuts). This particular concern may be somewhat alleviated by the scale of aid since mooted by Mr Trump.
The Fed was already worried enough by liquidity in the overnight bank lending market to have its New York branch make billions of dollars available to fund repurchase (repo) agreements. Longer term asset buying (QE) is in part to smooth out anomalies in the vital US treasury bond market. Preventing liquidity drying up in these key markets is vital but so is government support for companies to prevent them defaulting on debt as cash flows come under strain.
Powerful fiscal response is already exemplified by Germany, which offered companies unlimited government credit lines and billions of dollars in tax deferrals in order to extend working capital cycles and mitigate the strains on cash flows. After Mr Powell’s opposite number at the European Central Bank (ECB), Christine Lagarde, made a speech that was maligned for not going far enough, Europe’s richest government felt compelled to act.
Since then the UK has announced a £350bn lifeline package for businesses and households and the US government is priming to fire a fiscal howitzer. Yet, continued whip-sawing of markets demonstrates that economic relief will require better news in tackling the humanitarian and health crisis as worldwide cases of Covid-19 approach the 200,000 mark and the death toll nears 8,000 people.