Comments on Federal Reserve Bank Actions

As you are no doubt aware, yesterday (Monday, March 16th) marked another difficult day for the stock market as investors reacted to the potential economic impact of the moves the world is taking to flatten the curve of COVID-19. We continue to monitor the markets and have recently shared with you our thoughts on the current environment and our investment strategy. Additionally, we continue to watch for monetary and fiscal policy actions taken to maintain market confidence and support our economy.  Sunday’s announcement from the Federal Reserve is just such an action, and we believe it was an appropriate response to the developing situation.  On Sunday, the Federal Reserve (“Fed”) made another emergency cut to interest rates, reducing its main policy rate by 1.0% to a range of 0% -0.25%.

Source: St. Louis Federal Reservhttps://fred.stlouisfed.org/

In addition to the interest rate cut, the Fed announced that it would purchase $700 Billion of government bonds and agency-backed securities while implementing several additional measures intended to pump liquidity into the system and keep the financial system operating smoothly.

The Fed is trying to stay ahead of expected disruptions and the anticipated economic slowdown caused by the rapidly spreading 2019 novel coronavirus. However, we respect that the Fed cannot directly stem the effects of the pandemic and there is a limit to its ability to boost economic activity. It is important to note, however, that bringing the Federal Funds Rate to 0% – 0.25% has not exhausted its monetary policy tools to continue to stimulate the economy. We are encouraged that the Federal Government and Federal Reserve Bank have ramped up their response to the crisis and we expect that such intervention will ultimately prove beneficial.

Why is the Fed taking these actions? By lowering interest rates, the Fed makes it cheaper for individuals to take out mortgages and finance debt while businesses can save money by borrowing and investing in their operations. The Fed also seeks to help consumers and businesses spend and borrow more. Helping banks is also a focus of the Fed’s actions. The Fed cut the interest rate on direct loans to banks and extended the term of these loans so that banks can meet the demands for credit from households and businesses.

 

Conclusion

Markets continue to show signs that sellers are not differentiating much between potential winners and losers indicating that it may be some time before they respond to medium and long-term fundamentals. This is important to recognize during volatile markets and uncertain times. We reiterate our statements from the last communication. “Enduring periodic times of high market volatility and unexpected negative events have historically been normal aspects of a functioning market. And true financial reward is ultimately delivered to those who maintain a disciplined long term investment strategy, especially in the face of adversity.”
We will continue to monitor daily market moves and implement changes in your portfolio as appropriate. As always, if you have any questions, please reach out to your wealth management team and look for additional communications as we work our way through these unusual times.