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Recovery Will Not Get Underway Until Next Year in Worst-Case Outlook: Fed Minutes

Published 04/08/2020, 02:03 PM
Updated 04/08/2020, 02:21 PM
© Reuters.

© Reuters.

By Yasin Ebrahim

Investing.com - The Federal Reserve signaled the current ultra-loose monetary policy measures would remain in place amid a "profoundly uncertain" backdrop, with policymakers expecting the economy to enter a recession this year and not recover until next year in a worst-case scenario, according to the minutes of its two unscheduled March meetings.

In a bid to soften the widely expected virus-led blow to the economy, the Fed, in two unscheduled meetings on March 3 and March 15, cut its benchmark rate by 50 basis points and 100 basis points respectively, to a range of 0% to 0.25%

It was the first time on record that the central bank had cut rates on two separate occasions between scheduled meetings.

The rate cuts were driven by expectations of a "likely decline in economic activity in the near term related to the effects of the coronavirus outbreak and the extremely large degree of uncertainty regarding how long and severe such a decline in activity would be," according to the Fed minutes.

As well as cutting rates, the central bank also resumed its financial crises era quantitative easing program, pledging to purchase $700 billion in Treasury and mortgage-backed securities to avert a financial crisis.

"We have responded very strongly not just with interest rates but also with liquidity measures today," Fed Chairman Jerome Powell said during a press conference on March 15.

But fears of a liquidity squeeze persisted, forcing the Fed into bigger and bolder action across markets, including short-term lending markets, currencies and corporate credit.

Over a three-day period from March 15, the Fed pumped $1.5 trillion into repo, or repurchase agreement, markets to ease cost of short-term borrowing, put $1.1 trillion into the commercial-paper market to calm credit worries, doled out $4 trillion in emergency aid to mutual funds and agreed with other central banks to create foreign-exchange swap lines to remedy dollar fund shortages.

In the days that followed, the Federal Reserve continued to fire its bazooka, backstopping corporate credit markets and businesses.

In what was perhaps its boldest move, the U.S. central bank said it would buy unlimited amounts of Treasuries and mortgage-backed securities – a move that many said indicates the Fed will do whatever it takes to support the economy.

"The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time," Fed leaders wrote in a statement following the announcement.

Most recently, the Federal Reserve has joined forces with the government to help backstop the $349 billion small business emerging lending program, which was launched last week and is expected to be expanded by another $250 billion.

Looking ahead, the central bank acknowledged that its outlook on the economy was "profoundly uncertain," but outlined two possible scenarios, which will largely depend on the evolution of the virus outbreak and the measures undertaken to contain it.

"In one scenario, economic activity started to rebound in the second half of this year. In a more adverse scenario, the economy entered recession this year, with a recovery much slower to take hold and not materially under way until next year. In both scenarios, inflation was projected to weaken, reflecting both the deterioration in resource utilization and sizable expected declines in consumer energy prices," the minutes said.

Against the backdrop of uncertainty, however, several Fed members cautioned against fears that the current crisis would be as long-lasting as the 2008 financial crisis   

"Several participants emphasized that the temporary nature of the shock to economic activity, the fact that the shock arose in the nonfinancial sector, and the healthy state of the U.S. banking system all implied that the current situation was not directly comparable with the previous decade's financial crisis and it need not be followed by negative effects on economic activity as long-lasting as those associated with that crisis," the minutes showed.

Latest comments

In the 2008 crisis Americans didn't lose their jobs and suffer personal loss. We are a consumer based economy. This time- " We're Screwed!!"
Viral infection still hasn't peaked, nobody can gauge economic impact, record money's being printed on top of record debts and deficits, and the markets are rising lmao. Thanks for playing everybody
ridiculous. this rally is a joke.
👽😂🛸👁️🌈☀️🙌🏼🤭
Market action this week seems to indicate 2020 pain has already been priced in .... does it not? Am I wrong with this assessment?
I also beloeve the pain is priced in. most of world economies start opening up and workers that been temporarily laid off will get hired back. I believe that markets will see new highs next year.
We are in phase 3. We have phase 4 Coming
few people appreciate that it takes time for economic activity to rebuild. you cant just snap your fingers and undue 2 months worth of idle plants, back inventory, 15% UE, cancelled and delayed deals and contracts and back rent/mortgage payments.
looks like stock market already knew on Monday, we found out on Wednesday. LOL. ATH by end of April at current pace. by end of June, 1/2 of the country will be able to retire.
 ATH = ALL TIME HIGH
Sorry Turtle, but your shell is cracked. Do you understand our economy runs on consumption. THE CONSUMERS ARE WIPED OUT!!!
Not me.  I put away for a rainy day and have been getting some great bargains.  I bought a backup power system 15KW for $1000.00.  They are usually 4999.00.  I am going to be buying a water well installed and a solar system once the price on those come down at least 50% as well.  This is a good time to buy if you have any money.
I don't know what's wrong with most America traders. The March 15 meeting minutes showed a lot of optimism. So what's the main point here. You also have a whooping $2 trillion first stimulus package with another $2 trillion coming up soon and there is so much demand for the USD in emerging economies. The USD shd be sky rocking by now....what the ******is wrong with you guys..
Seems legit
so because Guatemala wants USD the economy is going to be okay?
Yet the market is going up
We will never get a 1200 check; tax free (sad face)
I got mine I bought beer
yea true
at least we will not run out of toilet paper
We will use $1 Billu0027s when they become worthless
why work if you can print?
hahaha. very good point
Fed behind the curve as usual. People need to prepare for severe stagflation
Seems we have an enormous amount of medical doctors working in wall street and the Federal reserve . Why covid 19 may end tomorrow ?
Doubtful. Besides, even if everything “opened” tomorrow it would take a significant amount of time for the economy to recover
I am not sure why traders can not accept that? It seems to me like they are living on Andromeda. I think economy on Andromeda has better future than our economy.
market is always in front of the news.
Yes. Market already made vakcine and Trump will tomorrow make announcement About how Jerome.P will present vakcine on Wall Street and stock will rise to 100k and that will be just beggining
year to year-and-a-half of testing... I don't know what are you talking about...
I know. It was sarcasm. Stock is moving like Trump already has vakcine and like all world is not lockdown
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