The US Federal Reserve cut rates this Sunday in an emergency announcement.
The Fed reduced the funds rate by one percentage point, to a 0–0.25% range. Just like that, the US now has rates close to zero.
The Fed also announced they are restarting their US$700 billion bond buying program in an effort to calm the markets and counteract the effects of COVID-19 on the economy.
Will this be enough to calm the markets?
As I have written before, our whole system is based on confidence. This is a move to restore confidence, and inject liquidity into the system.
US Fed chairman Jerome Powell said as much during the press conference:
‘Financial conditions have also tightened markedly. The cost of credit has risen for all but the strongest borrowers, and stock markets around the world are down sharply…
‘I won’t go into detail on the other actions we took today, but they involved eliminating reserve requirements for banks and encouraging banks to make use of intraday credit with the Federal Reserve and to use their capital and liquidity buffers as they support lending to households and businesses…’
When there is a shock like this and fears of a recession increase, liquidity is one of the things to disappears first.
At the same time, Powell has promised to ‘use our full range of tools to support the flow of credit to households and business, to help keep the economy strong, and to promote our maximum employment and price stability goals.’
This comes right after a surprise move on 3 March by the US Fed when they also cut rates by 50 basis points.
And, so far, much like last March, markets aren’t buying it.
Bloomberg reports today:
‘U.S. stock futures tumbled, wiping out most of the rally that swept Wall Street in Friday’s last hour and tripping exchange trading curbs, as investors worried that emergency measures by the Federal Reserve will fall short of cushioning the coronavirus’s blows to the economy.’
The ASX is also diving today. At time of writing the ASX is down by over 7%.
On the other hand, both gold and bitcoin are up.
Gold is up by close to 2% in Australian dollar terms at time of writing. Bitcoin rallied after the announcement and while it’s somewhat dropped since, the price has increased almost 3% in the last 24 hours.
What could happen next?
It remains to be seen if the stimulus is enough to make up for the loss in consumer spending and the prospect of company earnings taking a hit with many countries in lockdown and consumers quarantined.
In our economy, consumer spending is close to 60% of our GDP. In the US, that number is at 70%.
I think this will be the trigger that will bring a huge shift in the economy.
The Fed’s move isn’t a new one.
After 2008, central banks around the world intervened to stop a depression by flooding the economy with liquidity through quantitative easing and lowering rates. The US Federal Reserve pumped US$4 trillion into the economy back then.
But that hasn’t brought in real growth. Instead, we have had salaries stagnate, low growth, low inflation, low interest rates and low volatility.
We’ve also had record high asset prices, high debt and high risk.
The rally and ‘growth’ we’ve had in the last 10 years has been a fake one…
In a recent interview, author Harry Dent sat down with The Rum Rebellion’s editor Greg Canavan to discuss ‘the great reset’, a once in a lifetime sale of financial assets, and why the stock and real estate markets will have to come down.