ONE STOP SHOP for all trade & fintech solutions between Brazil & USA.

Federal Reserve Needs to Cut Rates to Zero Now and Move Towards Quantitative Easing

fed needs to cut rates now- brasprise

Let’s face it folks…the fear factor is really going off the charts and steering markets to a crisis….. We say bring our ECONOMICS skills to the table NOW….. this is the time to deploy tools kept under the hood of a sound fiscal policy maker…..we’re talking about taking this damn FED rate to zero and starting on gradual quantitative easement to re-establish liquidity and consumer/spending confidence before the FEAR FACTOR takes financial markets in a nose dive from where it can’t plow back without permanent irreparable damage.

The Federal Reserve is forecast to ease monetary policy further next week, but considering the escalating turmoil on Wall Street, we should be prepared for the central bank to act much sooner. And we should be prepared for something big. The Fed can’t delay any longer.

Policy makers have a big decision to make. Do they continue with their usual approach of gradually reducing interest rates? Or do they make a more aggressive move? There is a strong argument for the Fed to take rates back to the zero bound all at once from the current range of 1% to 1.25% — and without delay.

The Fed needs to face reality. There is no longer any point in “keeping their powder dry.” A half-percentage point would leave hardly  any powder, just 0.5% to 0.75%. That would easily disappear with just a handful of weak economic reports.  Moreover, there is little hope financial markets are going to suddenly stabilize. The number of coronavirus cases will only climb as will the associated economic disruption.

To be sure, this crisis differs from the last two. Rather than a shock from Wall Street feeding into the real economy, the opposite is occurring. But that doesn’t leave the Fed off the hook. Its immediate focus must be on supporting the financial sector so that it doesn’t collapse and exacerbate the weakness occurring in the economy.

Signs of credit stress were in abundant on Tuesday, with companies raising cash by rushing to tap credit lines. This is perfectly rational behavior on their part but creates a sudden stress on the financial system to meet the demand for cash. In addition, yields on U.S. Treasuries fluctuated wildly throughout the day, ultimately rising despite the sell-off in equities. Even super safe municipal bonds took a beating.

Bringing interest rates to zero is only the first step. The Fed has a number of additional tools at its disposal that it needs to be prepared to bring to bear sooner than later, as they will only become less, not more, effective if the financial sector slips into a crisis. Some they have already used, such as expanded repo market operations. Some are holding in reserve, such as a standing repo facility, quantitative easing or yield curve control. Should credit market functioning be sufficiently impaired, it could return to the special liquidity facilities, although the bar to using such tools is higher after the Dodd-Frank Act.

The Fed isn’t the only game in town. Fiscal policy has a big part to play as well to support the Main Street economy, an area where any Fed action won’t have an immediate impact. But until fiscal stimulus comes to bear  — Tuesday’s address by President Donald Trump fell short of expectations for a large stimulus package — the Fed is the only game in town.

By virtue of their surprise decision to lower rates by half a percentage point on March 3, policy makers have already decided they are prepared to move very aggressively to sustain the economic expansion. Realistically, it may already be past the point of no return in terms of a recession, but gradualism is no longer an option.

Sources : Bloomberg and Intelprise 

Share this post

Scroll to Top