US Fed Conducts Second Emergency Cuts and Launched QE4

In a surprise move, the US Federal Reserve unexpectedly decided to an emergency cut to its benchmark Federal Funds rate (FFR) by a sharp 100bps to 0.0-25%. On 3 March 2020, the US Fed already lowered its FFR by 50bps to 1.00-1.25%. In its latest statement, the US Fed cautioned that the outbreak has weighed on communities and has disrupted economic activity in many countries including the US. Therefore, the US Fed decided to cut its FFR in an effort to mitigate the negative effects of the outbreak on US economic as well as to stimulate maximum employment and price stability. Following the 100bps cut, the US FFR is now at its lowest rate since November 2015.

Despite the negative implications of the outbreak on the US economy, the US Fed was still positive on the labour market as “job gains have been solid, on average, in recent months, and the unemployment rate has remained low”. This has been reflected in the nonfarm payrolls which increased by 273k in February maintaining its highest rise since May 2018 for the second consecutive month, while unemployment dropped slightly lower to 3.5%, its lowest level in more than 50 years.

More importantly, the US Fed launched the quantitative easing (QE4) in order to support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities (MBS), where holdings of Treasury securities were raised by US$500bn and its holdings of agency MBS by US$200bn. The Fed’s balance sheet currently stands at about US$5trn (was US$4.3trn following the commencement of the repo operations in September 2019 due to the shortage of liquidity which has already increased the Fed’s balance sheet by about US$500bn). Recall that, between October 2017 and August 2019, due to the Fed’s balance sheet normalisation, assets had fallen to about US$3.8trn.

In the statement, the US Fed also noted that its prepare to use its full range of tools to support the flow of credit to households and businesses, indicating that more measures may be introduced in the next FOMC or 1H2020 meetings (17-18 March, 28-29 April, and 9-10 June 2020). We believe that if economic indicators, especially from consumer and business sentiments, continue to weaken, there is also the possibility of US Fed engaging in other easing instruments. The Federal Reserve guided such measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks—the U.S. dollar liquidity swap line arrangements.

Source: Affin Hwang Research - 16 Mar 2020