A massive rollout of easing measures by the Federal Reserve served to deepen some investors’ anxiety over how effectively policymakers will be able to mitigate the economic damage from a spreading coronavirus pandemic.
To many, the Fed’s dramatic actions brought home the severity of the situation the U.S. finds itself in as it is confronted by an accelerating epidemic that threatens to tip the world’s biggest economy into recession.
Others said that with financial markets in turmoil and the economy slowing, the virus’ broadening impact on activity cannot be solved by monetary policy alone.
“This is an indication that the central bank is very scared about the environment we’re in,” said Michael O’Rourke, chief market strategist at JonesTrading in Stamford, Connecticut. “The policy response is so strong, it’s likely to spook investors.”
Stock futures plunged to their daily limit on Sunday evening after the announcement, in which the Fed said it would cut interest rates to near zero and restart bond buying.
Some market watchers said the Fed’s actions were reminiscent of its efforts to help the economy emerge from the financial crisis more than a decade ago — a worrying comparison to many investors.
“Markets see Fed replay of 2007-8-9 and are assuming a repeat of the financial crisis is at hand,” said David Kotok, chief investment officer at Cumberland Advisors.
The Fed acted to mitigate the economic fallout as governments around the world sought to stem the spread of the virus that has infected over 156,000 people globally and killed more than 5,800.
France and Spain joined Italy in imposing lockdowns on tens of millions of people, while the United States saw school closings, runs on grocery stores, shuttered restaurants and retailers, and ends to sports events.
Goldman Sachs Group Inc (GS.N) downgraded its U.S. growth forecast for the first and second quarters. It now expects real gross domestic product growth of 0% in the first three months of the year, from its original estimate of 0.7% expansion. For the second quarter, it sees U.S. growth contracting 5.0% from its initial forecast of 0%.
“I still think, particularly after this weekend, where most people saw just how much activity stopped, there are still going to be concerns that it could be a deep recession from this. It may be short, but it could be pretty deep,” said Rick Meckler, partner with Cherry Lane Investments in New Vernon, New Jersey.
Joachim Fels, PIMCO global economic advisor, said in a note that a global recession appeared to be “a foregone conclusion.”
“The task at hand for governments and central banks has been and continues to be to ensure that the recession stays relatively short-lived and doesn’t morph into an economic depression,” Fels wrote.
Analysts at TD Securities were surprised that the Fed didn’t provide any measures to support the commercial paper market — which is used by companies for short term loans and has been experiencing stress in recent days.
Others noted that the Fed appeared to be using its playbook from the financial crisis when the current situation — a ballooning public health crisis — calls for massive fiscal support.
“The Fed also pushed the focus back onto the government as a fiscal response is critical and needed soon,” analysts at OANDA said.
Some investors said the Fed was taking important steps even if taming markets in this situation was beyond its control.
“This is the Fed’s ‘whatever it takes’ moment,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. “A … rally looks increasingly possible, particularly if political leaders follow through on building support for fiscal stimulus measures.”
Perhaps one of the most important factors for asset prices, investors said, is how difficult it is bring the virus under control, with the top U.S. infectious disease expert warning that the worst was yet ahead.
“What we need to see additionally is the trajectory of the virus,” said Phil Orlando, chief equity market strategist at Federated Hermes in New York. “We’re getting the Washington policy response but we have to see we’re making progress on combating this virus.”