On Sunday evening, March 15th 2020, the Federal Reserve (FED), which is the United States of America’s Central Bank, announced some extra-ordinary measures to help its economy battle the effects of the Corona Virus (COVID-19). The main measures proposed are:
- A reduction in the target interest rate to 0.0 -0.25%
- Resumption of its bond buying program by at least US$500 billion to increase liquidity in the market
- Support for US dollar short-term funding markets through its overnight operations
- In co-ordination with other global central banks, the FED has introduced US dollar liquidity swap-line arrangements (basically to ensure easy access to US dollars between those countries).
Ok, what does all the foregoing mean? Well, to answer that question, it is important to understand what the Fed considers to be its primary mandate, which is to promote maximum employment and price stability. Therefore, it will use all tools available, such as those listed above, to achieve those two main goals.
So, now that you understand what those measures mean, you then will naturally ask, why? Why such a large cut in interest rates? The FED makes decisions using a very data-driven process, which takes into consideration, short, medium and long-term outlooks. Furthermore, because the FED’s decisions don’t immediately affect the economy, that is, it operates with a lag, the FED senses that the measures required to stop the spread of the COVID-19, would have some bad economic outcomes in the short to medium term. Therefore, by making funding easier and cheaper between financial institutions, and more accessible among households, the economic impact of COVID-19 could be lessened. In a nutshell, that is the essence of the motivation behind the FED’s intervention.
We view these measures positively, because once there is anxiety and fear in markets, liquidity and easy access to funding especially among financial institutions is paramount.
Finally, we remind you to not act impulsively, remember your investment objectives and think long-term.
Disclaimer: This review is for information purposes only. The information stated herein may reflect the opinion of the analyst. Any opinion, estimates or forecasts reflects judgment as at the date of the report in relation to available data and market conditions. This does not constitute any representation or warranties in relation to investment returns and the credibility of the sources of information relied upon in the preparation of this report, without further research and verification. The value of any securities or securities for any issuer referred to in this document may rise or fall for several reasons including but not limited to market conditions. Before making any investment decision, please consult an investment advisor at Barita Investment Limited