SINGAPORE (Mar 24): The US Federal Reserve’s whatever-it-takes move came on Monday as it put forth several measures to relieve the ailing American economy in a race against time.
This includes extending loans to big and small businesses and purchasing unlimited amounts of government debt to keep money flowing to companies and households.
The central bank’s move comes after its emergency rate cut last week – the second time this month – where it lowered its target range from 0% - 0.25% from its previous range of 1% - 1.25%.
“This is not about helping Wall Street, this is about helping Main Street,” explains Janet Yellen, former Fed Chair.
“The availability of credit for households and businesses is essential to protect people from the worst possible economic effects,” Yellen says, adding that the current economic downturn threatens to be surpass the 2008 Great Recession as businesses struggle to stay afloat and layoffs mount.
US President Donald Trump responded to the move, saying current Fed chair Jerome Powell has “done a really good job”.
“I’m very happy with the job he did,” Trump adds.
US markets too showed signs of happiness initially as futures turned positive and bond markets showed less signs of stress.
However, these gains were short-lived as the Dow Jones Industrial Average dipped 3% or 582 points to close at 18,591.93 points on Monday. This erases the index’s gains since Trump won the presidential election on Nov 8 2016, analysts say.
Meanwhile, the S&P500 was down 2.9% to 2,237.40 points and the Nasdaq 100 was down 0.3% to 6,860.67 points.
Back home, the benchmark Straits Times Index was up 2.87% to 2,297.61 as at noon, with the majority of its 30 constituent stocks trading in the green.
Meanwhile, gold prices have responded well to the move. Spot gold climbed 3.7% – its highest percentage gain since June 2016 – while US gold futures rose 1.6% to US$1,592.20 per ounce.
Despite improvements to credit markets after the Fed’s action, analysts note that investors remain hesitant to invest, presumably till congress gives companies and households a cash injection to pay their bills.
“Corporate bond markets, the mini bond market, even the mortgage market are frozen. They are not functioning,” observes Julia Coronado, a former Fed economist and founder of MacroPolicy Perspectives. “All of this is happening much more quickly than it did in 2008.”
So far, Americans have pulled out an estimated US$24 billion ($34.9 billion) from banks, Deutsche Bank reports, adding that this indicates how worried people are.
Institutional investors, too, are showing a reluctance to invest as prime money market funds – one of the closest equivalents to cash – reportedly lost 11% of total assets.
To this end, Lombard Odier’s Asia-Pacific Chief Investment Officer Jean-Louis Nakamura says the Fed’s defining move is “an answer to the growing concern that fiscal transfers might not reach beneficiaries fast enough to avoid a dramatic wave of bankruptcies”.
Others, like Oanda’s senior market analyst Edward Moya, say the move alleviates liquidity concerns of the US dollar and derails possible currency wars.
For now, analysts expect the stock markets to take some time to adjust to the magnitude of the Fed’s move. However, Nakamura envisions a further stimulus would be needed to tide the American economy through the pandemic.
