March 15th FOMC Follow-Up

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Extraordinary Market Events:

  • Implied and realized volatility in both stocks and bonds has ramped to levels not seen since the global financial crisis.
  • Equity markets officially entered bear market territory, with key benchmarks down over 20% from mid-February highs.
  • The entire US Treasury yield curve briefly traded below 1%, as the 10-year bond breached 0.40% and set all-time lows.
  • Oil has fallen 48% year-to-date as a pricing war between Saudi Arabia and Russia compounds global demand concerns.

Aggressive Monetary Policy Response:

  • 2/28/20 – In a short statement, Chair Powell acknowledged how “the coronavirus (COVID-19) poses evolving risks to economic activity,” and the futures market focused on “act as appropriate” messaging to price in near-term cuts.
  • 3/3/20 – With its first emergency action since October 2008, the FOMC unanimously voted to reduce the Fed Funds rate by 50 bps, bringing the targeted range down to 1.00% to 1.25% ahead of their planned meeting on March 17-18.
  • 3/12/20 – To address “unusual disruptions” in the US Treasury market, the Fed announced that it would supply $1.5 trillion of temporary liquidity through repurchase (repo) operations in order to purchase securities across the range of maturities.
  • 3/15/20 – With a statement in lieu of an official meeting, the FOMC cut the Fed Funds rate by another 100 bps, lowering the target range to 0.00% to 0.25%. Vowing to utilize its “full range of tools to support the flow of credit,” the Fed will also expand its balance sheet by at least $700 billion in coming months with direct purchases of US Treasury and Agency MBS securities. In an effort to promote lending, related actions reduced reserve requirements for US banking institutions.

Economic Impact Remains Uncertain

While “the US economy came into this challenging period on strong footing,” economic activity will be negatively impacted as expansive infection is met with swift and severe containment measures. Forecasters now expect the economy to fall into a recession during the first half of 2020, with the shape of the recovery ultimately determined by the success of health care experts and the critical response from fiscal policy makers to assist effected businesses and households. With the economic outlook changing so rapidly, the FOMC itself decided not to produce any updated summary of economic projections but committed to remain highly accommodative “until it is confident that the economy has weathered recent events and is on track” to achieve its goals of maximum employment and price stability.



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