Fed cuts policy rate by 0.5 per cent with more to come suggests RSM

Commenting on the Federal Reserve’s decision to cut its policy rate to a range between 1.0 and 1.25 per cent, Joe Brusuelas, Chief Economist at RSM US said: 

‘The deployment of monetary firepower is a clear signal to policymakers and investors that there will be a major slowdown in economic growth in the United States that will last until late 2020. 

‘While the Fed is not well positioned to address supply shocks, the relief provided by this rate cut will support rate sensitive sectors such as autos and the housing industry that will likely experience a large shock as households pull back on large capital purchases during what looks to be a period of barely there growth ahead. 

‘In his press conference, Fed Chair Jerome Powell stated that the Fed is talking with the global central banks and investors should anticipate a period of a variety of liquidity commitments, increased asset purchases and rate cuts to support targeted funding by G-7 fiscal authorities. 

‘We expect further rate cuts by the US, UK and EU. We also anticipate the Bank of Japan will make commitments to increase asset purchases. All will likely provide enhanced forward guidance around their respective central bank meetings.

‘The major question that has to be addressed is assuming this is a transitory event will the Fed take back the rate cut in early 2021 once the worst of the crisis has passed? 

‘We expect another 0.5 per cent cut by the end of 2020 and do not rule out a return to zero in the event that the virus results in a large downturn in economic activity.

‘There is a strong case to be made that the fiscal authority and not the monetary authority needs to take the lead on addressing the economic risks around the Covid-19 virus. There will be an interagency meeting in Washington DC today (Tuesday) that will start the process by which the federal government will utilize its powers to provide trade and bridge financing to small and medium enterprises that may face a period of reduced revenues. That should also include a period of regulatory forbearance and in the case of the Covid-19 virus resulting in a large economic downturn, the construction of a special lending facility to offset what would be an increase in unemployment and bankruptcies. It will be soon be time for the federal government to bring out its biggest gun: fiscal firepower.’