Economy, Latest on coronavirus outbreak

US Fed averted markets' virus panic for now: Experts

Fed's unprecedented steps seemed to calm down markets for now, but positive trend in stock markets may not be sustainable

Aysu Bicer   | 25.03.2020
US Fed averted markets' virus panic for now: Experts


Although the Fed’s new move on unlimited bond purchases partially soothed investors, it still remains a question whether the impact of these steps will be sustainable or not, according to a number of economists.

The U.S. Fed on Monday unveiled a set of aggressive measures to cushion the economic impact of the global coronavirus pandemic, indicating new quantitative easing measures.

The move, along with previous measures, is expected to provide support to a wide range of markets and institutions, thereby supporting the flow of credit in the economy.

Last week, the bank announced that it would purchase at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities.

With the latest moves it will buy an unlimited amount of Treasury bonds and mortgage-backed securities in order to bring down interest rates, helping markets function smoothly.

It will back the flow of credit to employers, consumers, and businesses by establishing new programs that, taken together, will provide up to $300 billion in new financing.

It will also include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.

After these steps, stock markets futures turned positive, with the Dow Jones enjoying its best day since 1933, along with Asian and European markets also rising Tuesday.

Although the Fed's moves were welcomed by world markets, investors seem set to continue being cautious.

According to some economists, due to coronavirus concerns, the positive trend in the stock markets, other currencies, and the appreciation of gold against the dollar may not be sustainable.

The sales pressure in stock markets may continue as well until the virus concerns pass.

Fed's latest moves staunching panic for now

"The Fed’s pledge has had the impact of lifting market confidence through the increased dollar supply, stepping back in dollar strength on the spot market," Jane Foley, senior currency strategist at Dutch-based Rabobank, told Anadolu Agency.

While this is an encouraging signal, there is a risk that it may not last, she said.

"Until there is confidence that the coronavirus crisis is no longer worsening, risk appetite could dip again, and this would likely lead to another surge in dollar demand," she added.

According to her, the measures announced by the Fed and other central banks to meet demand for dollars have had some success in staunching the panic. At least for now.

As long as the mortality rate associated with coronavirus continues to rise in the EU and U.S., business and consumer confidence will be depressed, and the threat to the real economy will be extended, she warned.

Peter Vanden Houte, chief eurozone economist of ING Bank based in Amsterdam, said the Fed’s money expansion steps are very important, as they will satisfy investors’ growing demand for dollar cash.

"That should take away some of the upward pressure on the dollar," he said, adding however, for the euro to recover some of its lost ground against the dollar, it is essential that the epidemic gets under control in Europe, something that still might take several weeks.

'Too early to call turnaround for real safe-haven assets'

The Fed’s move seemingly helped to alleviate the distressed selling recently seen in gold markets, said Alexander Kozul-Wright, a commodities economist at London-based Capital Economics.

"It’s too early to call a turnaround for real safe-haven assets, such as gold," he noted, adding that looking ahead, the rising possibility of a deflationary cycle poses major downside risks for the price of gold.

It is still unclear whether the Fed’s actions will stave off a period of sustained deflation, he said, adding that the end-2020 forecast for the price of gold is $1,600 per ounce.

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