The FOMC had another surprise meeting today (March 15, 2020) after just having a surprise meeting less than two weeks ago.
The Federal Reserve is lowering its federal funds target rate to a range of 0% to 0.25%. It slashed its target rate by 50 basis points less than two weeks ago, and it just cut another 100 basis points to go up against the zero mark. In order to achieve this, it reduced the amount paid on bank reserves to 0.10%.
The Fed will also purchase $700 billion in new assets, with a breakdown of $500 billion in Treasury securities and $200 billion in mortgage-backed securities. It didn’t give a specific timeframe except to say in “coming months”.
It is not surprising to see an official return to quantitative easing (QE). It is not completely surprising to see a return to a zero-interest rate policy (ZIRP). The speed of it is a bit surprising.
It is also surprising that the Fed is including mortgage-backed securities (MBS) in its asset purchases. This was more easily explained in the fall of 2008 when the housing bust was already well underway.
I don’t know if the Fed is going to purchase MBS as an attempt to prevent a big fall in housing, or if it is much worse than this. It makes you wonder if some of the major banks are in a lot more trouble than we are being told.
The loose monetary policy from the Fed is no surprise given the events that have unfolded in the last few weeks. Again, the speed and degree of the reaction from the Fed is a bit surprising.
The other interesting thing is that the Fed is supposedly dropping its reserve requirements for banks, which was typically 10%. I am not sure what to make of this at this point, and also whether it will have any impact in the near term.
It is hard to know how this will ultimately play out. The Fed nearly quintupled its balance sheet from 2008 to 2014, yet we saw relatively tame consumer price inflation. This is largely due to the fact that the commercial banks massively increased their excess reserves.
As I write this now, the stock futures are down big, but it is hard to say how much of this is due to the FOMC surprise meeting. Volatility has been high, to put it mildly. I expect stock prices to fall much more before this is all over. We were already in a massive bubble without fear of a virus.
Investors will continue to flee to long-term government bonds. This means yields will go down to near zero. Maybe we will see negative yields just as we have seen in Japan and parts of Europe.
Bitcoin has shown that it is a speculative bubble. People are not buying Bitcoin for safety. We’ll see if this bust is the end of cryptocurrencies.
I am still bullish on gold in the long term. With a bad recession, it may go down more, as people look for liquidity and safety. But if the Fed keeps printing digital money – and there is no reason to think it will stop any time soon – then gold will likely do well in the long run.
If we eventually have a return of significant price inflation, then I believe silver will boom as well. But silver is going to be far more volatile and less certain in the short run.
I have been waiting for the bust. I just didn’t think it would happen so dramatically and so quickly. This is just the beginning. Even if the virus goes away, this bear market is not going away any time soon.