MARKETS & ECONOMY

Recovery Will Not Get Underway Until Next Year in Worst-Case Outlook: Fed Minutes

nvesting.com – The Federal Reserve signaled the current ultra-loose monetary policy measures would remain in place amid a “profoundly uncertain” backdrop, with policymakers expecting the economy to enter a recession this year and not recover until next year in a worst-case scenario, according to the minutes of its two unscheduled March meetings.

In a bid to soften the widely expected virus-led blow to the economy, the Fed, in two unscheduled meetings on March 3 and March 15, cut its benchmark rate by 50 basis points and 100 basis points respectively, to a range of 0% to 0.25%

It was the first time on record that the central bank had cut rates on two separate occasions between scheduled meetings.

The rate cuts were driven by expectations of a “likely decline in economic activity in the near term related to the effects of the coronavirus outbreak and the extremely large degree of uncertainty regarding how long and severe such a decline in activity would be,” according to the Fed minutes.

As well as cutting rates, the central bank also resumed its financial crises era quantitative easing program, pledging to purchase $700 billion in Treasury and mortgage-backed securities to avert a financial crisis.

“We have responded very strongly not just with interest rates but also with liquidity measures today,” Fed Chairman Jerome Powell said during a press conference on March 15.

But fears of a liquidity squeeze persisted, forcing the Fed into bigger and bolder action across markets, including short-term lending markets, currencies and corporate credit.

Over a three-day period from March 15, the Fed pumped $1.5 trillion into repo, or repurchase agreement, markets to ease cost of short-term borrowing, put $1.1 trillion into the commercial-paper market to calm credit worries, doled out $4 trillion in emergency aid to mutual funds and agreed with other central banks to create foreign-exchange swap lines to remedy dollar fund shortages.

In the days that followed, the Federal Reserve continued to fire its bazooka, backstopping corporate credit markets and businesses.

In what was perhaps its boldest move, the U.S. central bank said it would buy unlimited amounts of Treasuries and mortgage-backed securities – a move that many said indicates the Fed will do whatever it takes to support the economy.

“The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time,” Fed leaders wrote in a statement following the announcement.

Most recently, the Federal Reserve has joined forces with the government to help backstop the $349 billion small business emerging lending program, which was launched last week and is expected to be expanded by another $250 billion.

Looking ahead, the central bank acknowledged that its outlook on the economy was “profoundly uncertain,” but outlined two possible scenarios, which will largely depend on the evolution of the virus outbreak and the measures undertaken to contain it.

“In one scenario, economic activity started to rebound in the second half of this year. In a more adverse scenario, the economy entered recession this year, with a recovery much slower to take hold and not materially under way until next year. In both scenarios, inflation was projected to weaken, reflecting both the deterioration in resource utilization and sizable expected declines in consumer energy prices,” the minutes said.

Against the backdrop of uncertainty, however, several Fed members cautioned against fears that the current crisis would be as long-lasting as the 2008 financial crisis

“Several participants emphasized that the temporary nature of the shock to economic activity, the fact that the shock arose in the nonfinancial sector, and the healthy state of the U.S. banking system all implied that the current situation was not directly comparable with the previous decade’s financial crisis and it need not be followed by negative effects on economic activity as long-lasting as those associated with that crisis,” the minutes showed.

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