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Fed Fires Round Three - Rate Cut To Near Zero & $700Bn QE


1. 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 Committee 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.

2. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The Committee will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

3. The Federal Reserve encourages depository institutions to turn to the discount window to help meet demands for credit from households and businesses at this time. In support of this goal, the Board today announced that it will lower the primary credit rate by 150 basis points to 0.25 percent, effective March 16, 2020. This reduction in the primary credit rate reflects both the 100 basis point reduction in the target range for the federal funds rate and a 50 basis point narrowing in the primary credit rate relative to the top of the target range.

4. In light of the shift to an ample reserves regime, the Board has reduced reserve requirement ratios to zero percent effective on March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.

5. The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing a coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.These central banks have agreed to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points.

Links to Full Statements

1. Rate Cut & $700 Bn QE -

2. Discount Window & Reserve Requirement -

3. Central Banks Coordinated US Dollar Liquidity -

What it means & impacts on Bonds & Stocks ?

This is second major set of changes after announcing a massive liquidity push through overnight and fourteen day repo operations along with POMO (Permanent Open Market Operations). As the first POMO was conducted on Friday , Fed bought securities worth $35 bn whereas the bids were more than that pointing towards a deeper liquidity requirement.

On Sunday in an emergency action it has cut rates near to zero as the fed funds range is now 0 to 25 bps. Along with this to boost another level of liquidity to banks by announcing purchase of assets worth $700bn split into $500Bn worth Treasury securities and $200Bn worth agency backed mortgage backed securities. This is also helped by a discount window that would reduce the cost of borrowing of the banks as the cost of lending also reduces. Another action taken is to remove the reserve requirement of all kind of depository institution that will also enhance the liquidity as bank level.

This has resulted in all major banks in USA to halt the stock repurchase program immediately and focus on operations to provide liquidity to households and businesses.

In terms of financial markets the initial reaction will be negative as it is taken that there is a larger consequence of economic activity than anticipated and FED has used most of the possible tools before its official meeting this week on 18th March. Currently the S&P 500 futures are halted on a lower circuit due to this action along with New York City schools , cinema halls and other non-essential places have been shutdown and there is an expectation of larger countrywide shutdowns.

10yr Bond yields have dropped again to Thursday low of 0.67% from where it moved up post FED announcement of the $3Trillion repo operations.

Our View :

Though the initial reaction by equity markets are negative taken that these actions indicate of a larger shutdown. But we believe such proactive steps by Federal Reserve in a quick succession will help it subside and reduce the impact economy along with equity markets. Banks will be utilising these steps to enhance the operations as the demand arises but till then there will be larger allocation of these funds that are cheapest cost in a year to treasury activities. This will surely boost the flows to Equity and Bond markets.

We do not anticipate that the virus situation is uncontrollable as per our previous reports and data we have noticed swift recovery in China from Feb low. Even other countries we expect the cases to peak out in May approximately. Once the reversal in economic activity takes place the Fed will find itself in a difficult place where reversing these actions will be very difficult that would certainly help the economic growth.

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