David Roberts

Fed makes the same mistake again

David Roberts

Following the Fed’s second emergency cut in rates, David Roberts explains why the US central bank has badly mis-timed purported shock and awe.


I said about the previous emergency cut in interest rates by the Federal Reserve on 3 March that I could not believe they announced this the day after the Dow Jones had rallied a thousand points. No surprise then that a worried market subsequently fell – and big time.


Well, the Fed has done it again. This is twice now that the ivory tower boys and girls at the Fed have badly mis-timed purported shock and awe. This is twice that recovering markets have been spooked by “emergency policy, what do they know that we don’t” responses from the US Central Bank.

And as for doing it when the US market is shut – what nonsense.

Markets rallied on Friday as people worked out that, in part, a much-maligned ECB president Christine Lagarde had helped to force Europe to engage in fiscal policy. Fed Chair Jay Powell and co, much vaunted, have once again made it easier for Trump and the divided Americans to dither in the eyes of the market and to delay an adequate response.

I hope I’m wrong and that by the time you read this the 5% loss on S&P futures has turned around. I hope I am wrong and that we hear concrete US plans for fiscal expansion this week. I fear I am not.

A decade ago, we watched as Hank Paulson and subsequent State Treasurer Tim Geithner showed Europe and the UK how to deal with an asset price crisis. Target the source was key, and in this case it is the broad economy, SMEs and production. In 2020, surprisingly it seems, the ECB and MPC have persuaded this side of the Atlantic to take the lead.

Buying a few more sovereign bonds might force prices up a bit. The odd person might refinance their mortgage although I doubt there will be much corporate investment. This is a supply shock as much as a demand one, and giving folk cheap money they just want to hoard is little more than useless. This is really why equities are swooning again.

We added a bit of bond rate risk and took a bit of credit risk out of portfolios on Friday. I learned my lesson, it’s just a shame the Central Bank didn’t!

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Monday, March 16, 2020, 12:35 PM