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Main » 2020 » March » 4 » Fed hit the dollar on the sly! The central bank unexpectedly cut rates, but something went wrong
Fed hit the dollar on the sly! The central bank unexpectedly cut rates, but something went wrong


No matter how much Jerome Powell and his colleagues claimed that the Fed does not suffer from the disease mirror room, where evidence of the financial markets are forcing her to do what she was going, the first since 2008 unscheduled rate cut in the federal funds has proven that it is not. Could the effects at an early stage in the form of coronavirus influence on the tourism, hospitality and producers, referred to in his speech, the chairman of the Federal Reserve, to force the central bank to cut borrowing costs by 50 bps? Very much doubt. Another thing - the fastest correction of S & P 500 from the record high levels, increase the probability of three acts of monetary expansion in 2020 over 80% and uncontrolled fall in Treasury yields. It seems that from time to time the Fed is still looking into the mirror.



The most serious since 2009 reduction of the rate and the unanimous decision of the weakening of the monetary policy of the central bank showed determination, but the market reaction was not at all the same as he had imagined. Major US stock indexes have lost about 3% of its value, while the yield on 10-year Treasuries for the first time in history has fallen below 1%. Spread betting with German counterparts fell to the bottom in 2017, which allowed the "bulls" on EUR / USD for some time to raise the quotes above 1.12. 

Dynamics of differential yields on US and German bonds


Source: Reuters.

What's the matter? Why even the radical actions of the Federal Reserve is not forced to calm down the markets? There are many versions. The first suggests that investors do not believe that Jerome Powell and his colleagues are able to cope with the coronavirus. Second, that the sharp decline in rates - a reason for serious concern about the fate of the US economy. Finally, the third, which Donald Trump announced that the Fed has signaled its willingness to do more, which disappointed financial markets. 

Despite the fact that previous pandemics have little impact on economic growth (such as "Spanish flu" due to the deaths of about 50 million, deducted from the US GDP is only 0.5 pp in 1918, and the epidemic of 1957-1958 and 1968 -1969 were even less destructive), this time it is serious. Agency S & P Global Ratings reduced projections American GDP from 2.2% to 1% in the first quarter. It believes that both April and June, the economy will expand by only 1%. According to Goldman Sachs, it will look even worse. 


Goldman Sachs forecasts for US GDP


Source: Wall Street Journal.


In my opinion, should be given the opportunity to market themselves to answer the question what will happen next. Continuation of the S & P 500 will convince correction that hand from the Fed is short, and make ready for the recession; while the gradual stabilization of the stock index will be a signal of investors' faith in the ability of the central bank. US dollar does not help either one of the two cases. Further rollback stock market is fraught with outflow of capital from the United States, and its growth will reflect the hopes for further easing of monetary policy. While quotation EUR / USD are above 1,1135-1,114, the situation continues to remain under the total control of the "bulls".


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