Asset managers have broadly welcomed the comprehensive stimulus package unveiled by the US Federal Reserve, while reminding that the economic impact remains to be seen. 
The US central bank cut interest rates by 1 per cent, taking them down to a target range of 0 to 0.25 per cent. The decision comes just two weeks after a 0.5 per cent cut was announced on 3 March.
It also announced $500bn of Treasury securities purchases and $200bn of mortgage-backed securities purchases over the coming months to address their ‘signs of stress and impaired liquidity’.
Fed chairman Jerome Powell told the media in a conference on Sunday that the measures were to ease the economic disruption caused by the outbreak of the Wuhan coronavirus.
The emergency rate decision comes after stock markets around the globe have been falling over the past several weeks. However, despite the Fed’s move the FTSE 100 and other global equity indices sold off in Monday’s trading session.
Performance of FTSE 100 on Mon 16 Mar 2020
Source: Google Finance
Powell said that the virus presents “significant economic challenges” and revealed a coordinated policy action along with the central banks of Canada, the UK, Japan, the eurozone and Switzerland.
He said due to the importance of the US dollar in the global economy, swap lines with the five major central banks would be maintained. The liquidity swap reduces the pricing of the central banks’ dollar swap lines, to allow for a greater amount of US dollars available for commercial banks across the various jurisdictions.
A Bank of England joint statement from former governor Mark Carney and new governor Andrew Bailey said the US dollar swap lines help to ease strains in global funding markets and support the supply of credit to households and businesses.
Despite the bold action, investors are unsure whether further monetary loosening will be enough to shore up the global economy and financial markets.
Russ Mould, AJ Bell investment director, said: “There can be no denying the Fed’s commitment to action but its dramatic move will initially stoke further debate as to whether the monetary medicine will work, on the economy or markets or both.”
He highlighted that this was the ninth rate-cutting cycle since 1970 and that lower interest rates generally support US equity prices.
However, he said the “frantic” rate-cutting did not help US equities during the 2000-03 and 2007-09 bear markets, and that could be what is worrying investors now.
“Those two bear markets were characterised by a recession, something which investors fear now in the wake of the Covid-19 outbreak,” he said.
Mould also brought up the fact that interest rates now are starting from a much lower point and that the Fed has assets $4.3trn on its books today, compared to $700bn in early 2007.
Furthermore, he pointed out that Robert Shiller’s cyclically adjusted price earnings (CAPE) ratio suggested US equities were expensive relative to historic norms in 2000 and 2007, and that “it has long since been suggested that they have become overcooked during this bull run, too”.
“Rather than valuing US stocks off one-year forward or two-year forward forecasts for earnings (as those forecasts can prove too conservative or too aggressive), the Shiller method look at the last 10 years on a rolling basis.”
He said that using this approach, US stocks have only been expensive twice before, in 1929 and 2000, with neither occurrences ending well for investors.
Commenting on the rate cut, Seema Shah, chief strategist at Principal Global Investors, said: “The Fed has thrown most its weight behind this move, offering almost everything it has to give, which raises the inevitable question – if this doesn’t work, what will?”
She said that the negative reaction by markets reaffirmed these worries and suggested that governments will likely need to accelerate fiscal stimulus.
“One negative surprise is that the Fed hasn’t introduced any measures targeted at commercial paper, which was another part of the market that was showing signs of acute stress last week,” Shah added.
Kames Capital head of fixed income Adrian Hull said the Fed’s decision was “unexpected, comprehensive and emphatic”.
“All in all it felt the Fed was prepared to provide liquidity to where it’s needed, in contrast to the ECB which last week revealed reluctance to do whatever it takes,” he added. “Of course, the Fed can only go so far to tackle the developing uncertainties of the crisis.”
Hull said that while monetary policy allows money to flow freely, what will be key to how the economic impact unfolds is how governments and banks use that availability.
Adrian Lowcock, head of personal investing at investment platform Willis Owen, said trying to time the markets is “impossible” and suggested investors try to ride out this crisis” without giving in to fear.
“It’s likely going to get worse before it gets better, so investors must brace themselves in the near term,” he warned. “However, once the infection rate peaks and the world gets back to some semblance of normality, markets could snap back as fast as they fell.”