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US Federal Reserve’s unconventional policy response
The US Federal Reserve has cut its benchmark interest rate while launching a multibillion-dollar quantitative easing program, as the impacts of the coronavirus affect the US economy.
US Federal Reserve’s unconventional policy response
The US Federal Reserve has cut its benchmark interest rate while launching a multibillion-dollar quantitative easing program, as the impacts of the coronavirus affect the US economy.
The Federal Reserve has looked to add confidence to markets as well as prevent disruption from aggravating what could be a severe economic slowdown from the coronavirus by adding at least $500 billion and its holding of agency mortgage-backed securities by at least $200 billion.
“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” the Federal Reserve’s statement read.
For the second time in less than a week, the Federal Reserve has lowered interest rates, this time moving the US cash rate to a range of 0 to 0.25 per cent.
“Consistent with its statutory mandate, the committee seeks to foster maximum employment and price stability.”
“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent,” the Federal Reserve statement noted.
The step of lowering interest rates was applauded by President Donald Trump, who said he wanted to “congratulate the Federal Reserve” for its actions.
While the Federal Reserve hoped to restore confidence with its cash splash, BetaShare’s chief economist David Bassanese believes it might have done the exact opposite.
“Hopes that this might boost market confidence appear to have backfired, with US futures weakening so far this morning.
“If anything, the Fed’s early move has denied the market the chance to enjoy a further (bear market) rally ahead of the expected decision Wednesday morning. Now there’s nothing much left for the market to be excited about this week, which is why the futures have declined,” Mr Bassanese said.
Looking domestically, the coronavirus could be the catalyst for further easing, with the official rate tipped to fall to 0.25 per cent.
“There’s a very good chance the RBA will cut rates to 0.25 per cent this week, and probably announce its own quantitative easing program, targeting 10-year bond yields as low as 0.25 per cent. This makes government bonds, even at current low yields, still a bargain,” Mr Bassanese concluded.
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