March 16, 2020

Fed Lowers Interest Rate to Zero, What Now?

Fed Lowers Interest Rate to Zero, What Now?

The world is facing a pandemic. These are extraordinary times, and we need extraordinary measures. On Sunday, the Federal Reserve made an extraordinary move to safeguard the economy from the impact of Coronavirus by dropping its benchmark interest rate from 0.25% to 0%. In addition to this, the Fed has relaunched its quantitative easing program and will buy $700 billion worth of assets that entail Treasuries and mortgage-backed securities.

However, these measures have failed to calm to the markets and once again we have started the week in a major turmoil. This is because cutting the interest rate to zero and restarting the quantitative easing package has send shockwaves.

Traders are highly nervous about this emergency rate cut and the fact that the Fed has started the interest rate cut once again. Having said this, it is a normal practice for market participants to display their nervousness as it reminds them of Lehman crisis weekend when the Fed becomes this much active. 

Nonetheless, the current move by the Fed should be considered as a big warning for banks that have taken the chainsaw to the US GDP forecast for the second quarter. The Fed wants the markets to understand that the bears cannot win this war, and they are there to support the markets at any cost.

What Have We Learned Previously?

If we have learned one thing during the financial crisis, it is that fighting the Fed was the worst type of trade because the most recent bull rally lasted over a decade. Now, with the Fed restarting the QE program, the chances are that the gold price may start to skyrocket once again once the dust has fully settled—meaning the current volatility dies down. Remember, during the financial crisis, when the Fed launched their QE packages, we experienced a massive rally in the price of gold almost reaching the $1900 mark.

As for the equity markets, I think we still need to be a little patient, but we need to be ready to react.  This means that we need to see some economic prints out of China as well as the US. At the same time, I think it is also about time for investors to start preparing their shopping lists and looking out for stocks that are down by over 50%.

Currency Price Action In forex prices, the dollar index faced its biggest blow due to the Fed’s reaction. The initial reaction was a downward move and the Euro became the apple of the eye for every forex investor because the European Central Bank hasn’t cut the interest rate during its recent meeting. The ECB interest rate is already sitting in the sub-zero territory, and everyone else is playing catch up by slashing their interest rates. Staying long on the dollar index may not be the best idea.