The US Federal Reserve has cut interest rates to nearly zero and launched a multibillion-dollar quantitative easing program as the bank tries to prevent another financial crisis.
The Fed cut its target range for the federal funds rate to 0-0.25 per cent, a level it expects to maintain until “the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals”.
It will also increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion – its first step back into quantitative easing since 2008.
“There are pluses and minuses from today’s surprise move,” said Kerry Craig, JP Morgan global market strategist.
“It may be a shot in the arm for risk assets and [help address] liquidity concerns and presents a more unified front from the US on coordinated policy action given the stimulus action from the US government announced on Friday – something that had been missing and added to market woes earlier last week.
“However, it also raises the question of whether the Fed has anything left in the tank should the spread of the virus not be contained.”
The move comes following weeks of extraordinary measures by the central bank, which has already launched one emergency interest rate cut and a $1.5 trillion repo program to ensure sufficient supply of liquidity to markets roiled by mass sell-offs.
But Mr Craig believes that the drag on the services sector from social distancing policies – as well as the impact of falling oil prices on the energy sector – could be enough to tip the US into recession, though “not necessarily a long one”.
“Approximately one-third of the recessions in the US over the last century have lasted less than eight months,” Mr Craig said.
“Markets may be increasingly expecting a repeat of the 18-month long recession that we saw in the GFC, but that may not play out this time around. Stimulus measures globally are likely to cushion the economic impact and could prolong the cycle once the virus spread passes the peak.”
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