Will Policy Response Help To Calm Markets


Within three months of writing our annual market outlook, our sentiment on economic growth has shifted down. Within this time the global economy has suffered from both a deadly new virus spreading throughout the world and a steep decrease in the price oil. In January we stated, “Entering 2020, it seems as if the Federal Reserve (“Fed”) will hold steady with current policy. With over $18 trillion dollars in negative yielding debt internationally, it is likely we will see similar policy abroad. Moving forward, the Fed will want to see how things play out, as pulling interest rates too low could cause inflation to surge while pushing rates upwards could inadvertently induce a recession. We expect Fed Policy will remain unchanged throughout this year.” A lot has changed since this piece was released.

As of Sunday, March 15th we have witnessed the second cut by the Fed to bring rates to a range of 0.0 – 0.25%. Additionally, the Fed announced they will be engaging in $700 billion in asset purchases which will add an additional level of liquidity to the market. Lowering interest rates and engaging in asset purchases (Quantitative Easing) are two of the Feds main monetary policy tools. The FOMC statement on March 15th stated, “The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.”  With this it is likely we will see continuation of the “lower for longer” interest rate environment we have grown accustomed to the past decade.

To this point, the implementation of fiscal policy has been less extensive. Although there are promises out of the White House, we have yet to see much of a coordinated effort in the United States between the executive and legislative branches. As of today, the policy response has been primarily centered around funding for health care with over $8 billion going to testing, vaccine development and local health care departments. The aid package, which was signed on March 6th, is a good start, but is it enough? Rumors emerged out of the White House this morning that the administration was seeking $850 billion in additional stimulus to fight the effects of COVID-19. The package will now head to Congress for approval.

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