Fed Goes Nuclear

kevin-temp2
Head of Fixed Income Strategy
Follow Kevin Flanagan
03/16/2020

The Federal Reserve (Fed) has responded yet again, but this time around, the policy makers made sure their message was heard loud and clear around the globe. Let’s just say, the Fed has gone nuclear!

  • For the third time, the Fed made an inter-meeting move by cutting the Fed Funds target a full 100 basis points (bps) to 0–0.25%. We are now back to ZIRP, a zero interest rate policy.
  • In addition, using a page out its financial crisis playbook, the Fed will coordinate with other central banks (Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Swiss National Bank) to enhance USD availability/liquidity.
  • Additional measures to address the funding markets were also announced, with perhaps the most recognized move being to lower the “discount window” primary credit rate by 150 bps to 0.25%.
  • While it would seem as if the U.S. policy makers have come close to exhausting their toolkit, remember, the “alphabet soup” facilities they used for the funding markets are still available.
  • Based upon Powell’s presser comments, it would appear as if negative policy rates are not on the table.
  • Also, the Fed can always raise its QE purchase amounts.

Will this latest action work? Great question! The Fed is certainly using its arsenal, but let’s wait and see what comes from the fiscal side of the equation. In our opinion, both monetary and fiscal policy responses are needed to break the negative feedback loop for the markets and the economy. 

Prior QE episodes also coincided with the U.S. Treasury 10-Year yield reaching a bottom and moving higher in subsequent months. We would expect this history to repeat itself and recommend considering rate-hedged strategies while paring long duration holdings.

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About the Contributor
kevin-temp2
Head of Fixed Income Strategy
Follow Kevin Flanagan
As part of WisdomTree’s Investment Strategy group, Kevin serves as Head of Fixed Income Strategy. In this role, he contributes to the asset allocation team, writes fixed income-related content and travels with the sales team, conducting client-facing meetings and providing expertise on WisdomTree’s existing and future bond ETFs. In addition, Kevin works closely with the fixed income team. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was most recently a Managing Director. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. He was a contributor to the Morgan Stanley Wealth Management Global Investment Committee, primary author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and collaborated with the firm’s Research and Consulting Group Divisions to build ETF and fund manager asset allocation models. Kevin has an MBA from Pace University’s Lubin Graduate School of Business, and a B.S in Finance from Fairfield University.