US: Fed cut key rates by 50 bp

After G7 central banks-finance ministers meeting, Fed decided an intermeeting rate cut by 50 bp to 1%-1.25%. Interest rates served on reserves was also cut to 1.10% and the primary credit rate also cut to 1.75%.

In its statement, Fed mentioned the US economy is still strong, but downside risks are developing related to the COVID-19.

Fed relaunched insurance cuts and risk management policy, as reactions from the US budgetary could be limited this year. This action also illustrates that Fed and PBOC are acting in parallel and are effectively the two main important central banks.

The G7 statement has disappointed, as it seems to delay any reactions, probably forcing the Fed to act pre-emptively and rapidly. Other rate cuts could be seen through the world; in the eurozone, a mix of monetary/budgetary measures should be announced quite rapidly, given COVID dynamic and ongoing risks in the main European economies.

G7 statement remains vague about further budgetary supports, but besides reinforcing health services, G7 finance ministers declared being ready to deliver fiscal supports, pointing also towards reinforced cooperation. Further announcements could be made in the following days regarding the fiscal and budgetary side.

This was validated by Powell’s in his press conference, with indirect mentions to potentially other G7 (non-US) announcements on the fiscal side to come.

In his press conference, Powell validated the Fed cut in order to ease financial conditions and reinforce confidence of economic agents to provide a boost to the next recovery. The door remains opened to potentially other Fed actions.

Patrtice Gautry March 2020



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