Fed Slashes Rate to Zero and Restarts QE But Stocks, Gold, and Bitcoin All Fall
- “Fed will continue to use our tools to support the flow of credit,” – chairman Jerome Powell
- Risk of recession is also mounting with US GDP forecast slashed and China posting a record drop in retail sales, manufacturing activity, and investment
- Japan’s central bank pledges to inject tens of billions of dollars while South Korea’s central bank cuts down lending rates by 0.50%
- Gold falls under $1,500 for the first time in 2020 while bitcoin back at $4,500
On the weekend, the US Federal Reserve swept into action to save the economy from the fallout from the coronavirus (Covid-19) by slashing its benchmark interest rate by a full percentage point to about zero and promising to boost bond holdings by at least $700 billion.
In the hastily assembled press briefing, Fed Chairman Jerome Powell said the virus’s disruption to lives and businesses means second-quarter growth is expected to be weak, advocating his fiscal policy.
“The thing that fiscal policy, and really only fiscal policy can do, is reach out directly to affected industries, affected workers,” Powell said.
“We do know that the virus will run its course and that the U.S. economy will resume a normal level of activity. In the meantime, the Fed will continue to use our tools to support the flow of credit.”
Risk of recession is also mounting
The Fed pulled out the biggest weapons in its arsenal, the key rate is now zero to 0.25% down from the previous target range of 1% to 1.25%, the record level to hit during the 2008 financial crisis. The central bank is also letting banks borrow from the discount window for 90 days with reserve requirement ratios reduced to zero percent.
— CZ Binance 🔶🔶🔶 (@cz_binance) March 16, 2020
President Donald Trump who as recently as Saturday attacked the Fed for not cutting rates further and faster, expressed support for their move on Sunday.
“It makes me very happy and I want to congratulate the Federal Reserve,” he said. “That’s a big step and I’m very happy they did it.”
The Federal Reserve has cut interest rates from 1-1.25% to 0-0.25%.
— The White House (@WhiteHouse) March 15, 2020
Initially, the stocks surged only to tumble on Monday despite the emergency measures to address the economic slowdown. The yield on US Treasuries fell sharply while pushing the prices sharply higher, the yield on 10-year Treasury note is now at 0.77%, up from 0.64 earlier.
The risk of recession is also mounting as the fallout spreads across the economy. Goldman Sachs has slashed its GDP forecasts, predicting zero growth in the first quarter.
New data currently shows China posting record drop in investment (24.5%), retail sales (20.5%), and manufacturing activity (13.5%) in the first two months of the year.
The central bank’s move to support the economy failed to soothe the market and financial markets remain on edge. Asian and European stocks are tumbling on Monday.
On Monday, Japan’s central bank announced that it would take emergency measures to stabilize the country's economy while pledging to inject tens of billions of dollars into financial markets and extending interest-free loans to corporations. The bank, however, declines to lower interest rates which are already negative for some bonds.
South Korea’s central bank also cut its benchmark lending rate by half a percentage point to 0.75%.
Gold and Bitcoin Take a Big Hit
Amidst this, gold has fallen below $1,500 for the first time this year as ‘sell everything' sentiment continues to grip the market over the past week. Bitcoin fell along with every other asset.
The digital asset jumped on the back of the Fed announces rate cut and QE but is now back to dumping. Towards the end of last week, the crypto asset had started recording gains but is now back into fresh losses. Bitcoin is currently down 16% and the market has lost a total of $30 billion.