The US Federal Reserve should notably draw its usual weapon in the face of the crisis and announce a rate cut, as all analysts now expect.
A card that she already released in early March, when the epidemic of new coronavirus began to dangerously spread in the United States, threatening the activity of the country. The Fed then lowered its rates by half a percentage point, to a range between 1% and 1.25%. And this without even waiting for its usual monetary meeting, which takes place every six weeks. A measure that it had not taken since 2008, when the subprime crisis was raging.
On Wednesday, its president Jerome Powell could even decide to go down to zero, and thus join many other central banks. In any case, this has been demanded for months by President Donald Trump, who criticizes the Fed for not doing enough, for slowing the growth of the economy.
“The Federal Reserve must FINALLY lower rates, to a level comparable to competing central banks,” he said on Friday on his Twitter account, a few hours before declaring the national emergency.
If Donald Trump is constantly storming against Jerome Powell, he assured on Saturday that he did not intend to appoint someone else to head the Fed.
Lowering rates, which lowers the cost of credit and thus stimulates consumption, works to support the economy during a classic crisis. But nothing says that it will be effective in fighting this unprecedented crisis.
Worst day on Wall Street Thursday since 1987
The challenge ahead of the US Federal Reserve is daunting, as the recession threatens the American economy and Wall Street experienced its worst day since the stock market crash in October 1987.
“The challenge is to provide funds to companies whose cash flow has been severely affected by the virus, mainly in transport, hotels, restaurants and other service sectors for which demand has fallen” says Keith Wade, chief economist of asset manager Schroders. Because if too many companies have to shut down, “the danger is that a temporary shock will have a lasting effect,” he said.
Her prognosis for next week? A further rate cut, but also redeem corporate debt: “Although this would require a change in the law in the United States, it could be more effective than rate cuts.”
Faced with the panic, the Fed has indeed watered the markets in liquidity all week, bringing several trillions of dollars, and resumed with the redemptions of American debt through the treasury bills.
Towards a return to “quantitative easing”?
Observers immediately saw the return of a tool used to combat the 2008 crisis: quantitative easing (QE), or quantitative easing, described by Barclays analysts as a “liquidity bazooka”. A tool which consists for a central bank in massively buying up debt securities from financial actors, in particular treasury bills or corporate bonds.
“The Fed has intervened aggressively to restore calm to the markets, but more is expected of it,” analysts at Oxford Economics said in a note.
This meeting “could be the moment, whatever the price, the Fed”, with a rate cut to the lowest, and “the official announcement of the renaissance of QE”, they add.
Since the last Fed monetary meeting, the face of the American and world economy has completely changed. What was only a risk with consequences that are still very uncertain at the end of January is today bringing the world economy to its knees.
Thursday, the European Central Bank had, in response to the coronavirus, not affected its rates, but presented an arsenal of technical measures, and felt that the answer must first come from governments.
As for the Bank of England, it lowered its rates to 0.25%, and that of Canada, by half a point.