Fed gets out its big bazooka

  • US Fed cut its policy rate by 100bp yesterday and announced more QE and targeted measures for banks to boost lending

  • Part of a range of emergency measures coordinated with other major central banks

  • But these measures alone will not be enough, national governments will need to do more

Fed gets out its big bazooka
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
16 March 2020
Published byTellimer Research

Major global central banks, in a coordinated response led by the US Federal Reserve, yesterday announced a range of emergency measures to mitigate the impact of COVID-19 on the real economy and to ensure markets continue to function smoothly. As we foresaw, this is a second wave of international measures following those announced at the time of the G7 finance ministers' meeting on 3 March. If the first wave was a sort of pseudo-coordinated panicked response, our sense is that yesterday’s measures are a bigger and more considered effort and may signal greater monetary policy coordination going forward.

The US Federal Reserve yesterday announced:

1. A further 100bp reduction in its target range for the Fed Funds rate to 0-0.25%. This follows the surprise 50bp cut on 3 March (see here). Yesterday’s move brings the policy rate down to its lowest level since the GFC. However, we note that the Fed didn't provide an assessment of the economic impact of COVID-19 on the US economy or a revised forecast for US real GDP growth this year in its relatively short statement yesterday. It noted that it will continue to monitor incoming information and use its tools as appropriate, with future adjustments to the stance of monetary policy guided by its maximum employment objective and symmetric 2% inflation objective. 

2. A new round of quantitative easing (QE) with central bank purchases of at least US$700bn in bonds, comprising at least US$500bn in government securities and at least US$200bn in agency mortgage-backed securities. With yields on safe-haven US Treasuries having already fallen to historical lows earlier this month, there is a risk that this pushes parts of the US curve closer to negative territory. The US 2yr was trading this morning at a yield of 0.31% (-18bp from Friday's close on Bloomberg), while the 10yr was 0.78% (-18bp). 

3. A raft of new measures aimed at supporting the flow of credit to households and businesses, by supporting liquidity and stability in the banking system and encouraging bank lending, including a reduction in the primary credit rate in the discount window, encouraging banks to use the Fed's intraday credit facility, and encouraging banks to use their excess capital and liquidity buffers – and reducing the reserve requirement ratios – to boost lending.

In addition, the US Federal Reserve, in a coordinated action with five other major central banks, agreed to enhance the provision of US dollar liquidity via the standing US dollar liquidity swap line arrangements. The central banks, which included the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank, agreed to lower the pricing on the standing US dollar liquidity swap line arrangements by 25bp. The standing swap line was introduced in 2013 after previous facilities were introduced in the aftermath of the GFC.

This second wave of emergency measures represents a new round of global monetary policy coordination following the G7 finance ministers meeting on 3 March and associated central bank moves. The Fed's measures in particular are bigger, wider-ranging and more targeted than its previous move (the UK’s Bank of England, for example, already announced measures to help SMEs at the time of its interest rate cut last week). This may help to reassure investors that US policymakers finally get it, after the muted response to its previous rate reduction two weeks ago. That said, the now very low level of policy interest rates across the world's major central banks may limit the extent of additional monetary stimulus they can provide for the world economy. 

However while this new round of measures may help to support fragile consumer and business confidence during this uncertain time, we think monetary policy is a relatively blunt instrument in dealing with the economic impact of COVID-19. Whether banks will be encouraged to lend, and consumers and businesses to spend, remains to be seen. Targeted fiscal measures, such as state support for ailing firms, salary protection for workers (for example, as announced recently in Denmark), or mortgage/rent payment holidays for those that are most affected, may help better to support confidence and mitigate the economic impact, at least in the short-term. However, even the fiscal response will depend on the degree of fiscal flexibility and fiscal space of national governments, especially amid warnings the pandemic could last many more months.