Before the open on Monday (Sunday night local time), the US Federal Reserve announced an emergency rate cut of 100 basis points lowering the fed funds rate to 0-0.25%, accompanied with the forward guidance that rates will be kept at that level until its policy-setting Committee "is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals". Balance sheet expansion is also being turned up to full throttle "over the coming months" by at least US$700bn, with Treasury purchases to increase by $500bn and mortgage-back securities by some $200bn. Whereas the Committee's recent focus regarding Treasury purchases was aimed at ensuring the fed funds rate remained within its target range, this is very much a return to the large-scale quantitative easing it has turned to on three previous occasions in the post-financial crisis era. Meanwhile, the Fed also revived a range of facilities to ensure smooth functioning and liquidity for commercial paper, money markets and primary dealers, as well as swap-lines with 14 other central banks across the globe to address the issue pertaining to the stretched supply of US dollars across markets. On the fiscal front, Washington is making preparations for a stimulus package in the order of $1tn to bolster the economy against covid-19, of which $500bn will be set aside for payments to households, $300bn in loans to assist small businesses, $150bn in funding for impacted sectors and $50bn specifically for the airline industry.
Across the Atlantic, the European Central Bank followed up last week's announcements (discussed here) by unveiling a €750bn Pandemic Emergency Purchase Programme (PEPP) with the continent facing a severe hit to economic activity from covid-19. Recent missteps in communication from the Bank resulted in a widening of peripheral bond spreads, hampering the transmission of its monetary policy settings. Keen to address these market dislocations and any perception that it was out of ammunition, the Governing Council's statement was from the playbook of its former President Mario Draghi of doing "whatever it takes" to support the single currency. As such, while the PEPP will see €750bn in purchases of public and private sector securities take place through to the end of the year, its size, duration and composition can all be increased or adjusted as required. Most notably, existing limits self-imposed by the ECB relating to government bond purchases (in line with the capital key) are to be relaxed in the PEPP, which will allow it to target dislocations in spreads, as occurred in Italian bonds last week, that would otherwise impair the ability of governments to support their economies through this shock. Underlining this point, the Governing Council's statement contained the line that it would "not tolerate any risks to the smooth transition of its monetary policy in all jurisdictions of the euro area". Together with earlier announcements, the ECB's asset purchases will ramp up by some €1.1tn out to the end of the year. Over in the UK, after last week's measures (discussed here), the Bank of England (BoE) came through with further stimulus announcing a 15 basis point cut in the Bank Rate to 0.1% and a £200bn increase in asset purchases. In conjunction with the Treasury, the BoE has established its Covid Corporate Financing Facility that will provide liquidity to firms to help them mitigate the impact of cash flow disruptions.
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Chart of the week
On the data front this week, February's update on labour market conditions was stronger than expected (full review here) but was of little market interest given that it preceded concerns around the covid-19 outbreak in Australia. Employment increased by 26.7k in the month — well clear of the consensus forecast for a 6.3k rise — while the unemployment rate declined from 5.3% to 5.1% in a reversal of its uptick in January. Clearly, the labour market faces significant headwinds in the months with hiring likely to freeze up and hours worked decline in response to disrupted trading conditions. The key for policymakers is to contain or limit a rise in unemployment over the next few months that would impair the recovery of economic activity once concerns around covid-19 subside.