- The Federal Reserve has cut interest rates by 50 basis points in a shock move.
- Markets have leaped on the news that mitigates the coronavirus crisis.
- The mood may turn quickly as the Fed cannot fight the disease.
Shock and awe – the Federal Reserve has cut interest rates by a double-dose of 50 basis points and triggered a stock market rally. The dollar immediately crashed while oil and gold surged.
It is a triple rarity: changing rates by a double-dose, doing it in an emergency move, and hardly providing any guidance.
As Joseph Trevisani said, the Fed prefers being "more safe than sorry." President Donald Trump has been pressuring the Fed, and he is surely pleased – but he may be in for a bitter surprise.
The Fed is indeed doing its part to ease lending conditions and to assist financial markets. However, the central bank does not have the medical tools to stop the outbreak, that goes without saying.
Supply side shock
On the economic front, the bank's move helps boost demand – but the shock is a supply one.
Chinese and other authorities are enacting social distancing to stop the contagion of the disease. This includes factory shutdowns – eventually hurting supply. The Fed is unable to open factories or change the dynamic.
Only governments can launch large projects that would boost supply. The White House is not enthusiastic to announce fiscal stimulus – and it is not alone. Germany is also reluctant to change its way of thinking and China is mostly focused on liquidity.
Markets set to fall, gold to continue shining
Shares on Wall Street have already pared some of their gains. Once the sugar rush fades, the patient may have spasms – equities may fall back down.
What about the dollar? The greenback may return to beating commodity currencies and lose to the safe-haven yen. Against the euro and the pound, the battle is more complex. nevertheless, without fiscal stimulus, both currencies may decline.
For gold, the rally may continue as the precious metal enjoys safe-haven flows and also low US rates.
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