FED PLEDGES AGGRESSIVE ACTION

The big thing about the US Fed meet was the fact that for the first time ever, the Press Conference was held ‘virtually’ and that seemed really disconcerting, bringing into perspective the extraordinary times we all are living in.  

The Fed statement as such did not really have much to say; nothing new to say.

The Fed Reserve said that US economy has deteriorated due to the pandemic and said that it is, “committed to using its full range of tools to support the U.S. economy in this challenging time.”  This is exactly what our RBI Governor also said.

The statement also said that this crisis will weigh heavily on the economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.

The Fed already has had two unscheduled meets as the crisis burgeoned – the rates have already been cut to near zero and also began purchasing huge amount of bonds – it has already bought nearly $2 trillion in Treasury and mortgage securities, larger than any of its bond-purchase programs between 2008 and 2014.

The rates cannot go down any further so then only two questions remain – how often will the Fed buy the bonds and how will the Fed assure the people that rates will remain where they are for a long time to come now.

In the ensuing presser, the Fed Chief, Jerome Powell painted a really scary picture ahead – rising unemployment, growth falling and the Q2 being especially very tough. The next phase is still uncertain as one does not know the trajectory of the virus. With gradual lockdown being lifted, it is not like people will go back to spending – people will continue to remain cautious and not spend like before; consumer spending which will kick start the economy will happen only when people are assured about a treatment. Thus in that context, the Fed said that the future currently looks tough and highly uncertain at this point of time.

Powell said that the Fed measures will continue for a good time to come, till it sees that the economy has landed safely on its feet. Prior to the Fed statement, there was macro data – the US economy shrank at a 4.8% pace in the first quarter as the coronavirus spread, the steepest contraction since the last recession in 2008.

For us, today will be about Reliance Inds results. The National Institute of Allergy and Infectious Diseases, USA, director, Dr. Anthony Fauci expressed optimism over the drug from Gilead. He said, “The data shows that remdesivir has a clear-cut, significant, positive effect in diminishing the time to recovery." This was good enough for the US markets to rally in the green and we could see the same optimism rub onto the Indian markets.

To conclude, every central bank of every country is doing all it can to mitigate the impact of the virus but the hard truth is that nothing will matter till we all are assured that we have a cure. Till then lockdown or no lockdown, the economy will hurt and bleed and the central banks can do what they need to.