Fed emergency cut and acceptance of unknowability

Fed in an unprecedented action has lowered the benchmark rate by 100 bps to get the target range to 0% - 0.25%. In a coordinated move with other central banks with whom the Fed augmented the swap lines, it also plans to purchase assets worth 700 bn $. In the press conference Fed Chief Powell touched upon many points like the possibility of negative interest rates, limits of monetary policy and the efficacy of economic forecasts.

On the limits of the monetary policy he conceded that the Fed doesn’t have the necessary tools to reach out to the people who are out of jobs and small businesses which are struggling with the demand shock and hence they are using the only tools which are available at their disposal. He added that may be the real solution lies in the realm of fiscal policy.

But the most important observation came on the issue of economic forecasts. He said that the economic outlook is evolving on the daily basis and depends heavily on the spread of virus and how long will the current situation last. He admitted that writing forecasts doesn’t make any sense as the virus spread ultimately lies in the domain of “unknowable”. Here comes the rub that Fed with its 2000 strong research staff is finally putting down the arms and saying that no sane forecast is possible, rest everyone can tread on the same humble path.

On the repercussions of the Fed cut, the market is now asking that why it was done just three days before the scheduled policy meeting and what do they know more which we don’t. The Dow futures are locked in the negative circuit at the time of writing this which is a unique reaction as the cut in the rates should have supported equities in normal times.

In keeping step with Reserve Bank of New Zealand cut the official rate by 75 bps to 0.25%. Bank of Japan has said that they will hold a one day policy meeting on Monday following the emergency rate cut. They have decided to move forward the meeting which was originally scheduled for Wednesday.