US Federal Reserve moves on rates

The US central bank decides not to wait and takes unusual step of lowering rates between board meetings

4 March 2020 | Shane Oliver, AMP Capital (Image: neonbrand)

The US Federal Reserve has lowered its key Fed Funds rate by 0.5% taking it to a range of 1-1.25%, to help combat the economic threat posed by coronavirus.

This followed G7 finance ministers and central bankers committing to use all appropriate policy tools to support growth in the face of the virus threat.

The Fed foreshadowed an easing on Friday, and it was thought it would wait to its March meeting in two weeks. But while it came two weeks earlier than expected, it had largely been anticipated by share markets with US shares rallying around 8% after the Fed foreshadowed the move on Friday to its high on Monday and then selling off -2.8% on the fact overnight.

Further easing likely

The Fed has signaled an openness to further easing and other central banks are likely to ease too – although in the case of the ECB and Bank of Japan this is more likely to take the form of specific measures to boost liquidity (including more QE) given that rates are already at zero or negative. We are also likely to see more fiscal policy easing globally although this may take longer.

The Fed is likely to cut rates by at least another 0.5% in the months ahead; and we continue to see the RBA cut again next month.

The track record of inter-meeting Fed rate cuts in boosting the US share market is not that positive. Of the seven inter-meeting or emergency cuts since 1998,  only two saw the market higher one year later – albeit this was because three of the emergency moves were in the tech wreck/911 bear market and three were in the Global Financial Crisis.

Monetary and fiscal policy easing is necessary to help minimise some of the worst economic fall out from the coronavirus outbreak (including liquidity and insolvency problems) and speed the eventual recovery.

Waiting for signs of COVID-19 control

However, we still need to see signs that the coronavirus outbreak is coming under control – with, for example, a peaking in the daily number of new cases beyond China or say antivirals being successfully deployed.

At present the daily number of new cases are still trending up in numerous countries outside China so it’s premature to say with much confidence that we have seen the low point in share markets.

Australian GDP numbers beat expectations

Australian GDP rose by 0.5% in the December quarter (beating market expectations for a 0.4% rise). The September quarter GDP data was also revised up from 0.4% to 0.6%. Annual GDP growth increased to 2.2%, although the headlines numbers look a lot better than the detail.

Private spending remains very weak. The ABS said that impacts of the bushfires were evident in “isolated areas” (as seen in lower spending on eating out in December retail sales numbers) but not at an “aggregate level”. A much bigger impact from the bushfires and COVID-19 is expected in the March quarter.

December quarter GDP data is in line with the RBA’s forecasts, but the growth outlook is challenging for Australia given the hit to tourism and education arrivals, especially from China, and more broadly from the coronavirus outbreak.

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital

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