Fed moves fail to reassure panic in the financial markets

In an emergency move on Sunday, the Federal Reserve announced it is dropping its benchmark interest rate to zero and launching a new round of quantitative easing. Federal Reserve cuts rates to zero and launches massive $700 billion quantitative easing program:

The Federal Reserve, saying “the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” cut interest rates to essentially zero on Sunday and launched a massive $700 billion quantitative easing program to shelter the economy from the effects of the virus.

The new fed funds rate, used as a benchmark both for short-term lending for financial institutions and as a peg to many consumer rates, will now be targeted at 0% to 0.25% down from a previous target range of 1% to 1.25%.

Facing highly disrupted financial markets, the Fed also slashed the rate of emergency lending at the discount window for banks by 125 basis points to 0.25%, and lengthened the term of loans to 90 days.

President Donald Trump said he was “very happy” with the Fed’s announcement, adding: “I think that people in the markets should be very thrilled.”

Wrong again. Despite the Fed’s aggressive move, the market’s initial response was negative. Stock futures drop — hit ‘limit down’ — even as Fed slashes rates; S&P 500 ETF down 9%:

Stock futures were down sharply on Monday even after the Federal Reserve embarked on a massive monetary stimulus campaign to curb slower economic growth amid the coronavirus outbreak.

Stock market futures hit “limit down” levels of 5% lower, a move made by the CME futures exchange to reduce panic in markets. No prices can trade below that threshold, only at higher prices than that down 5% limit.

Dow Jones Industrial Average futures were off by more than 1,000 points, triggering the limit down level. S&P 500 and Nasdaq 100 futures were also at their downside limits.

This led traders to look at the SPDR S&P 500 ETF Trust (SPY) — which tracks the S&P 500 — for a better indication of how the market will open. The SPY ETF plummeted 9% in the premarket, signaling that a “circuit breaker” will be triggered shortly after the regular session starts. ETFs that track the Dow and Nasdaq 100 — the SPDR Dow Jones Industrial Average ETF Trust (DIA) and Invesco QQQ Trust — were also down more than 8%.

While the central bank’s actions may help ease the functioning of markets, many investors said they would ultimately want to see coronavirus cases peaking and falling in the U.S. before it was safe to take on risk and buy equities again.

“The Fed blasted its monetary bazooka for sure,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “This better work because I don’t know what they have left and no amount of money raining from the sky will cure this virus. Only time and medicine will.”

The weekend’s news about the coronavirus outbreak was not helping sentiment. U.S. cases have jumped to 3,774 and 69 deaths, according to Johns Hopkins University. The U.S. Centers for Disease Control and Prevention urged organizers to cancel or postpone events with at least 50 people.

“The main problem this time as to other market disruptions is the abrupt closure of economic activity,” said Dan Deming, managing director at KKM Financial. “The speed of the impact to middle America, let alone the global community is relatively unprecedented.”

The economic impact is going to get worse. CDC Urges Scrapping All Mass Gatherings in U.S. For Eight Weeks. And Retail store closures in the US could explode because of the coronavirus.

The Federal Reserve is almost out of monetary policy tools to prevent a financial crisis and a recession. The Fed’s Future Is Already Here as U.S. Joins Zero-Rate World (excerpt):

The Fed, so central to the country’s strategy of managing business cycles, may no longer be well-equipped to deliver its mandate of maximum employment and stable prices on its own.

Zero, Then What?

That idea has gained strength during the coronavirus emergency, when Fed interventions haven’t been able to arrest the gathering rout on markets — a pattern that repeated late Sunday as U.S. stock futures hit limit-down.

“The Fed doesn’t really have the scope to do what it needs to do,” said Narayana Kocherlakota, president of the Minneapolis Fed from 2009 to 2015. “The takeaway from that, I guess, is monetary policy can’t really do much at this stage.”

Investors have instead been laser-focused on the White House and Congress -– and whether they’d manage to deliver fiscal support for businesses and workers, as Americans hunker down at home to avoid infection. In Europe too, fiscal authorities were getting a rude wake-up call that spurred them into action.

“Monetary policy will be increasingly dominated by fiscal considerations – a trend that has been underway for time already,” Joachim Fels, global chief economic adviser at bond fund Pimco, wrote in a note after Sunday’s cut. That’s “exactly what is needed at a time of crisis when the conventional tools of monetary policy are largely exhausted.”

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On Sunday, as it returned to what’s known as the zero lower bound, the Fed said it will keep rates there “until it is confident that the economy has weathered recent events.”

Other developed-world central banks have been stuck in the zero-trap for decades, and struggled to get traction. That’s one reason why proposals more radical than anything on the Fed’s own radar have been bandied about with growing urgency by monetary policy wonks.

Negative rates, already attempted in Europe and Japan, have their advocates — including President Donald Trump — though Fed officials dislike the idea and Powell again dismissed it at his press conference on Sunday.

Big Lift

In the coronavirus world, the economy is set to cool rapidly regardless of where interest rates are, as spending on things like travel and dining plummet overnight, and workers get laid off.

Unemployment is at 50-year lows now. But policy makers recall how it almost doubled in a span of 18 months during the financial crisis – peaking at 10%, and not dropping back to 5% for another six years.

Meanwhile, yields on even 30-year government bonds far below the 2% inflation target, investors — signaling that the Fed won’t have to worry about the timing of a rate-hiking cycle, the kind of strategic question the review was designed to answer, for a long time to come. Instead, firefighting tactics are again the order of the day.

“The European Central Bank has been stuck at zero. The Bank of Japan has been stuck at zero for even longer,” he said. And markets think “it’s going to be really hard for the Fed to launch again.”

We are now back in bailouts and big fiscal stimulus package territory again, like the 2008 financial crisis.

UPDATE: The Dow suffered its worst day since the “Black Monday” market crash in 1987 and its third-worst day ever — even after the Federal Reserve embarked on a massive monetary stimulus campaign to curb slower economic growth amid the coronavirus outbreak.