What’s Going On Here?The US Federal Reserve (the Fed) announced a second coronavirus-induced interest rate cut in as many weeks on Sunday, but the central bank – whose powers seem to be fading – may have finally found its kryptonite. What Does This Mean?This cut returns the key US interest rate to near-zero, where it was held between 2008 and 2015 following the global financial crisis. The Fed announced other measures too – measures which should, in theory, encourage banks to lend to businesses, helping shore up their bottom lines and, in turn, the wider economy. They included $700 billion worth of “quantitative easing” – in which the central bank puts cash into commercial banks’ hands by buying bonds – and lowering the “reserve requirement ratio” to zero. Banks, in other words, aren’t expected to keep a fraction of their customers’ deposits with the Fed as a buffer any more, freeing up even more cash for economy-boosting loans. Why Should I Care?For markets: Running out of runway.
The Fed’s actions make it easier to borrow, it’s true. But that’s not much comfort for the airlines, restaurant chains, and countless other sectors that have seen demand crater lately – which might explain why shares fell on Monday (tweet this). What’s more, the Fed admitted it doesn’t think negative US interest rates would necessarily help matters. That suggests there might not be much more the central bank can do, and puts more pressure on the US government to take further action.
Zooming out: Visions of the future?
Chinese data out on Monday was some of the first to officially document the economic damage the outbreak is doing. The country’s industrial output contracted at the fastest pace on record in the first two months of this year, while urban unemployment hit its highest rate ever in February. Add to that a more than 20% decline in retail sales and an almost 25% drop in fixed asset investment, and you’ll start to get a picture of just how bad things might get… | 