The Fed Acts and the Upcoming Recession – March 18, 2020
The Fed didn’t (couldn’t) wait until its scheduled Wednesday meeting. Instead, it acted Sunday afternoon.
- The Fed slashed its key rate 1-percentage point to 0 – 0.25%.
- It announced QE (quantitative easing/Treasury bond and mortgage-backed security purchases) of $700 billion. The goal is to inject cash into the financial markets.
- The Fed also announced coordinated action with global central banks.
Expect additional measures to support the credit markets.
- The goal—maintain liquidity in the financial system, preventing credit markets from freezing up as occurred in 2008.
Credit markets that aren’t functioning normally could restrict loans to businesses and consumers, which would exacerbate economic weakness and increase uncertainty in the financial markets.
Silver lining—the epicenter of today’s crisis is not the banking system, which remains solid thanks to stronger capital standards implemented after 2008. But we would be remiss if we didn’t acknowledge the health concerns we are experiencing.
Investor’s corner
Fiscal (govt. spending/tax cuts) and monetary policy (interest rates/QE) actions are designed to ease the economic blow and facilitate an economic rebound.
Whether it will begin in March or in the second quarter, expect a recession and a sharp drop in Q2 GDP, as businesses temporarily close and sales evaporate.
Could we see a sharp economic rebound? The expected recession isn’t being caused by typical economic conditions that precede a recession. It’s an exogenous shock.
Remove the hurdle, which is the COVID-19 epidemic, and we might see a quick rebound as confidence returns.
Created 2020-03-18 14:20:13