US Fed cuts its policy rate to mitigate the impact of Covid-19 The US Federal Reserve cut its benchmark Federal Funds rate (FFR) by half a percentage point from 1.50-1.75% to 1.0-1.25%. This was a surprise move as the decision was outside the scheduled FOMC meetings, where the next meeting will only be on 17-18 March 2020. This was the US Fed’s first emergency rate cut since the Global Financial Crisis in 2008. In its statement, US Fed noted that it took this action in view of “the coronavirus poses evolving risks to economic activity … and in support of achieving its maximum employment and price stability goals.” While we believe the Committee is concerned on the implications of Covid-19 on the economic outlook, it noted that fundamentals of the US economy remain strong. This has been reflected in the country’s nonfarm payrolls which rose by 225 thousand in January 2020 from 147 thousand in December while inflation remains stable. In the last FOMC statement in January, the US Fed remained positive on the labour market conditions supported by solid job gains and low unemployment rate.

We believe the latest surprise cut by US Fed signalled concerns that the US economy may be impacted by the outbreak, attributed mainly to the global supply chains disruption and negatively impacting on manufacturing output around the world (including US), and eventually affecting domestic demand in the country. According to IHS Markit, the global manufacturing PMI fell sharply from 50.4 in January to 47.2 in February, this was its lowest level since May 2009, as global trade and supply chains were severely disrupted by the Covid-19 outbreak.

From here on, if the Covid-19 outbreak continues to worsen, we believe the US Fed is likely to cut Fed Funds rate further in the next FOMC or 1H2020 meetings (17-18 March, 28-29 April, and 9-10 June 2020), even though some market observers expect no further easing of monetary policy. We believe that if economic indicators from the US continue to weaken, there is also the possibility of US Fed engaging in other easing instruments (i.e. quantitative easing) in 2H2020. Apart from uncertainty on the recent outbreak of Covid-19, the progress towards a ‘Phase two’ trade deal, and possible escalation in renewed trade tension may potentially impact on both the global and US economy. However, we believe US Fed’s main concern is Covid-19, which poses as a potential risk to the Fed’s economic outlook.

Source: Affin Hwang Research - 4 Mar 2020