Monday Musings: March 16, 2020

Mar 16, 2020

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Public Trust Credit Team
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The Fed announces major emergency moves ahead of Wednesday’s scheduled meeting

On Sunday March 15, 2020, the Federal Reserve cut the Fed Funds rate by 100 bps to a target range of 0.0% – 0.25%. In its policy statement, the Fed announced “it 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.” The Fed also increased its pledge of increased quantitative easing measures by increasing its holdings of Treasuries by at least $500 billion and its holdings of agency MBS by at least $200 billion. In the face of disrupted financial markets, the Fed is encouraging all banks to utilize the discount window to help alleviate liquidity risk and ensure the smooth flow credit across the economy while also lowering the rate of emergency lending through the discount window for banks by 125 bps to 0.25%. In relation to this measure, the Fed is encouraging banks to use any excess liquidity and capital for lending purposes and has thus eliminated reserve requirements. With investors shoring up cash, the market is now looking to the Fed to become a buyer in the U.S. commercial paper (CP) market to help free-up liquidity ahead of potentially large outflows from money-market funds over the coming days. The Fed has not yet responded to this plea from investors who hope the central bank will soon announce a CP funding and dealer purchase facility in which it will purchase CP from both issuers and broker-dealers directly, similar to measures taken in 2008.

The Federal Government aims to provide economic support for Americans as the country faces a challenging health crisis with COVID-19

U.S. House of Representatives passed H.R. 6201, Families First Coronavirus Response Act this past Saturday in response to the COVID-19 outbreak. The bipartisan bill includes expanded access to free testing for COVID-19, provides $1 billion in food aid, and establishes an emergency paid sick days program for many Americans. The bill has been sent to the Senate which will review it this week in hopes of swiftly passing an economic relief package to assist Americans affected by the outbreak. This would be the second piece of coronavirus-based legislation to pass after Congress approved an initial aid package of $8.3 billion earlier in March. This past Friday, President Trump declared a national emergency due to the virus outbreak, freeing up $50 billion in Federal aid and allows the Federal Emergency Management Agency (FEMA) to utilize funds to expand personnel and assist state and local agencies in dealing with the outbreak.

China's PMI’s slide: a harbinger for the U.S. economy

Manufacturing and nonmanufacturing PMIs for China were released today, and the effects of the coronavirus-related shutdowns are beginning to show up in the data. Manufacturing PMI came in weak at 40.3 but this almost seems strong when comparing it with the services number of just 29.6. For PMI surveys, a value over 50 signals expansion and a value below 50 signals contraction. The data from China is a harbinger of what is likely to come in the U.S. Over the weekend, several cities shut down restaurants and bars while a majority of cities implemented bans on gatherings of more than 250 people. U.S. manufacturing was already soft before the virus and will likely continue to show similar softness as in China. The key measure to focus on going forward will be for the services sector which, until the virus, was still expanding resiliently. Between companies mandating work from home, businesses shuttering their spaces, and bans on public gatherings, the virus certainly appears to be the catalyst that could finally stop an impressive run of consumer spending that was buoying the domestic economy.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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