“QE4, put in a floor!”

It looks like we’re in for another volatile week.

Last night the Federal Reserve held an emergency session in lieu of its meeting scheduled for later this week. 

It was part of a coordinated action with other central banks.

Fed Chairman Jerome Powell announced several steps to support the economy as it weathers “disruptions caused by the coronavirus.” The Fed will:

+ Cut the fed funds rate a full percentage point to zero.

+ Cut the discount window rate for bank loans by 1.5 points to 0.25%.

+ Buy at least $500B of Treasuries.

+ Buy at least $200B of mortgage-backed securities.

+ Expand overnight and term repurchase agreement operations.

This looks like the Fed’s 2008 playbook. QE4 is here.

The Journal wrote that it is far from certain “whether the methods deployed against a financial solvency panic in 2008 will work against a pandemic-caused liquidity panic.”

The discount window rate-cut is probably the most significant step. 

It enables banks to borrow from the Fed without sparking rumors that they are having financial trouble and could not find help anywhere else. With a rate this low, every bank will borrow for the great deal. Nobody will stand out.

This gooses liquidity, which is the name of the game in a flip-out like this. The low-rate discount window keeps credit available to businesses and households.

If stocks tank even after the Fed’s move, you can be sure pundits will say the Fed failed and is impotent, but it’s an unfair accusation. 

The Fed is getting ahead of a financial system lock-up, not curing the coronavirus. Stocks, it seems, are pricing in months of flatlined economic activity, which is outside the Fed’s purview.

Also, in a joint statement yesterday the Federal Reserve, European Central Bank, Bank of England, Bank of Japan, Bank of Canada, and Swiss National Bank said they would cooperate to make sure dollars keep flowing unimpeded around the globe.

Applied Finance co-founder Rafael Resendes provided helpful comments to The Market last night:

“While analysts expected 10% EPS growth, now the market is pricing EPS declines for 2020 and 2021, before resuming a 10% growth path. This drop in earnings expectations compares to the 15% drop in 2007, followed by a 78% drop in 2008 during the Great Recession. 

“At this stage, we don’t believe Covid-19’s economic path will compare in intensity or duration to the Great Recession. As such, this initial market reset seems extreme. …

“Short-term market movements are irrelevant to long-term results—unless you miss big upswings after panic selling. Panic selling and missing the upside returns as markets return to normal set back wealth accumulation by years if not an entire decade.”

Hang tough, my friend.

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3 Comments

  1. Paul Borreson
    Posted March 17, 2020 at 6:23 am | Permalink

    Thank you for continuing to provide perspective!!

  2. Henry Mourad
    Posted March 17, 2020 at 3:18 am | Permalink

    To keep calm, I remind myself of the time of the 9/11 attack and what it did to small business. People were scared and withheld spending. Yet, it was a great time to buy. In the Great Recession, similar situation developed and the market bottomed and slowly but surely turned around. In this particular medical crisis, the impact on small business is just as great. However, I believe the duration will be significantly shorter. We may get a relief rally in the process, followed by a retest of the lows. That’s how markets work. I also believe that in six months all this will be behind us. You may call me an optimist, maybe, but I’m also a realistic person. I learned from my mistakes through the years. Hopefully, I’m wiser now and can reap the rewards.

  3. K. Lacey
    Posted March 16, 2020 at 9:20 pm | Permalink

    While the government is trying to work magic, they forget their role in assuring the people that we are OK. The headlines and government actions are instilling fear into the populace. Closing restaurants is questionable, as they serve tens of thousands meals per day. Where are those folks going to eat? If folks staying in hotel rooms have to buy food at the supermarket, that will overload that supply chain, not to mention the problems of trying to cook and store foods in your hotel room. I understand this is somewhat new to the U.S. and we are operating without a playbook, but those in charge seem to less confident than the average citizen.

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