In its second surprise move in less than two weeks, the Federal Reserve took big steps on Sunday to revive quantitative easing, or money printing, and cut the overnight interest rate to a range of 0.00% to 0.25%. The central bank announced a plan to print $700 billion and use the funds to buy U.S. Treasury bonds and mortgage-backed bonds, just as it did during the Great Financial Crisis.
Fed Chair Jerome Powell said:
“The virus is having a profound effect on people across the United States and around the world.”
The Fed started the ball rolling, and soon the European Central Bank (ECB) and the Bank of Japan (BoJ) followed its lead, as did the Bank of New Zealand and Australia’s central bank.
The coordinated moves will make loans cheap, but they can’t do much to address the underlying issue caused by the coronavirus… consumers won’t, or in many cases aren’t allowed to, spend money. Unless the central banks are going to give free cash to businesses large and small, the worldwide lockdown is going to take a huge bite out of consumer spending, and therefore global GDP.
Matt Sherwood, Sydney-based head of investment strategy at investment firm Perpetual, said:
“A global recession has moved from a risk case to a base case.”
To put it in perspective, consider that the price of oil is about $30, less than half of the high of $71.75 it touched earlier this year.
But just because the central banks can’t address the main problem from fighting the coronavirus doesn’t mean that their actions won’t have any effects. Moving rates to zero will still crush savers who rely on fixed income, savings accounts, or CDs for monthly checks.