Fund managers react to Fed rate cut

The US Federal Reserve has been accused of “spooking” markets with emergency policy for a second time following the latest interest rate cut on Sunday.

The Fed cut interest rates to nearly 0% on Sunday night to shore up the US economy in light of the coronavirus pandemic. The action came just two weeks after a rate cut on March 3.

David Roberts, head of the Liontrust global fixed income team, said the earlier March 3 rate cut came a day after the Dow Jones had rallied a thousand points, but the “worried market” subsequently fell “big time”.

Now, he says, the Fed “has done it again”.

“This is twice now that the ivory tower boys and girls at the Fed have badly mis-timed purported shock and awe. This is twice that recovering markets have been spooked by [emergency policy responses] from the US central bank,” said Roberts.

The current situation, he added, is “a supply shock as much as a demand one, and giving folk cheap money they just want to hoard is little more than useless. This is really why equities are swooning again”.

The Fed also pledged nearly $700 billion in quantitative easing.

Seemingly in more positive tones towards the Fed, Kames Capital’s head of fixed income, Adrian Hull speaking Monday, said: “Unexpected, comprehensive and emphatic. Just some of the descriptions I would use about last night’s Federal Reserve action.”

He added: “Most importantly, the US Federal Reserve has authoritatively provided support for US Treasuries within the global financial plumbing. And the Fed went further, tackling mortgage assets too, reversing its balance sheet reduction over the last two years.”

He added: “All in all, it felt the Fed was prepared to provide liquidity to where it’s needed, in contrast to the ECB [European Central Bank] which last week revealed reluctance to do whatever it takes.”

Judicious use of monetary policy – particularly for the benefit of smaller and more indebted companies – will be key to how the economic impact unfolds, Hull said.

There were other measures made by the Fed and also measures from the US government this weekend.  David Page, head of macro research at Axa Investment Managers, also appearing relatively supportive, described the Fed as one of the swiftest responders and said monetary policy easing will lay the groundwork for a broader recovery in economic activity over the coming quarters and years to replace the lost demand likely over the coming months.

He pointed out the US government response had included declaring a state of emergency and providing over $40 billion in funding to the Federal Emergency Management Agency, and $50 billion increased fiscal support for Medicaid.

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