9 to 15 March: The Fed has gone all in on Sunday

Despite the positive start of the year, the economic disruption caused by the Covid-19 has most likely led to a significant weakness across multiple industries globally. Although the range of available hard data remains limited to gauge actual activity, it is a foregone conclusion that we will probably see evidence of a weakening global economy in the first half of 2020.

To cushion the (expected) economic slowdown and to try ensure global financial stability, the Federal Reserve on Sunday reduced the Fed funds rate to its zero lower bound, committed to an open-ended asset purchase programme (at least USD 500bn US Treasuries and USD 200bn mortgage-backed securities) and opened USD swap lines with five major central banks. However, we believe that monetary policy itself is no panacea for the underlying issue brought about by the Covid-19 (as we pointed out in our GMU last week). This idea was also echoed by the Fed Chair’s cautious words during his press conference on Sunday.

The trillion-dollar question is when the US administration will finally present a comprehensive fiscal plan in the amount of at least 0.5% of GDP. We are of the view that the current circumstances strongly call for fiscal policy to step up to fill the void caused by the loss in demand. In our opinion, bolstering aggregate demand would stabilise both the economy as well as financial asset prices.

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