Well, well, well ...... who'd be a central banker ?


ref :- General

After the Federal Reserve's surprise (shock ?) move in slashing rates by 50 basis points yesterday, we had to pen a little addendum to what we were banging on about earlier in the day. Remember we were pontificating about how effective monetary stimulus could be in fighting the Coronavirus-induced slowdown, and the dangers of central bankers, and particularly the Fed, being seen as reliable saviours for investors when things turn nasty ? As it turns out, we didn't have long to wait before we saw new evidence of just how difficult the fallout from this pandemic (is it one yet ?) will be for central bankers, investors and in fact anyone else you care to mention.

The Fed hasn't executed an "emergency" rate move, i.e. one outside of its regular policy meetings, since the Financial Crisis. It made its move only about half an hour after a joint statement from G7 finance ministers and central bankers pledging to use all available tools against the threat posed by Coronavirus. They are the first, and so far only, of the seven to take action .... and what's more, they went for 50bp when it has been their norm to move in 25bp steps. All in all pretty decisive action, wouldn't you say ?

And the market reaction ? DOWN ..... stocks finished nearly 3% lower. Of the safe-havens, gold jumped about $50 and buyers of US Treasuries forced the 10yr yield down to a barely believable 0.91% at one stage. So how does that work ? Seems like the Fed can't win ....

First of all, we have to believe that though the Fed, of course, wants an orderly market they are not in the business of saving investors from losses, whatever some investors might think. Monetary policy is formulated to keep a watchful eye on inflation and to protect and grow the economy and employment, and in the long run of course that will be reflected in share prices. Yesterday's action had the opposite effect of what one might theoretically expect for a number of reasons :

Market psychology -- taking such a bold and unexpected step less than a week after saying that no emergency measures were being contemplated before the scheduled FOMC meeting on 17/18 March gave the investors the jitters. "What does the Fed know that we don't ? Wow, things really must be bad ...."

Fed communication -- the action may have been decisive, the conference given by Fed Chairman Jerome Powell less so. He gave investors little reason to think that he stood foursquare with them. He made no mention of the fact that the 13% tumble in share prices last week had tightened financial conditions to such a degree that the 50bp cut in rates barely made up for it. He also had nothing to say about measures beyond conventional monetary policy.

Lack of ammunition -- if conventional monetary policy is all you've got, you really need a bit more room to manoeuvre that anyone's got right now. Yesterday's cut brings Fed Funds down to a band of 1.00 - 1.25%. A further cut of 25bp is FULLY PRICED IN for later this month, and another 25bp cut is widely expected in June. That doesn't leave much of an opportunity for the Fed to spring any more surprises. If they've got any other plans in mind beyond rate-cutting, they're not talking about them.

Frankly, it's not easy for the Fed and it's not being made any easier by the President, who immediately bawled them out for not cutting further. We have to wonder ..... if investors smelt a bit of panic about the Fed's sudden 50bp cut, what would they have made of things if the Fed had followed Mr Trump's wishes ?

Addendum to the addendum

A bit of a rally going on in stocks this morning, and it's down to the results of Super-Tuesday and the votes for Democratic candidates in no less than 14 US States. It's a measure of just how big the Coronavirus issue is that for a while Super-Tuesday seemed to slip many peoples' minds. It was a very good day for Joe Biden, whose campaign, of course, had got off to a poor start in the early primaries. He now looks like the slight favourite for the nomination ahead of socialist Bernie Sanders. The markets are certainly happy that the chances of the decidedly market-unfriendly Sanders have been reduced in favour of a more middle-of-the-road candidate, though Mr Sanders did take California and is not far behind. Whether either stands a viable chance against the sitting President is another matter ....

NOTE : Trump is 73, Biden 77 and Sanders 78 .... however else the world has changed, plainly US politics is not yet a young person's game.

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