- The estimated number of total global coronavirus infections has risen to more than 169,930 with at least 6,522 associated fatalities
- Approximately 3,309 of the deaths linked to the novel coronavirus have occurred outside of mainland China across 47 different countries
- There are currently 3,782 confirmed cases of COVID-19 in the United States (69 fatalities)
- The novel coronavirus has now spread to every continent on earth except Antarctica
- The U.S. Federal Reserve announced a package of measures on March 15 aimed at assisting the American economy during the coronavirus crisis, including a full-point cut of benchmark interest rates to near zero
- A coronavirus vaccine developed by Moderna (MRNA) will enter clinical trials on March 15 with support from the National Institutes of Health (NIH). It’s expected to take anywhere from 12 to 18 months to fully validate any potential vaccine
- President Trump announced a “state of emergency” March 13 at the federal level in the United States
- The Centers for Disease Control and Prevention (CDC) recommends canceling or postponing events involving more than 50 people for at least eight weeks
- The majority of states in the U.S. have now closed schools and universities for an undetermined length of time
- The United States federal government has tapped a network of 2,000 laboratories to assist with coronavirus testing
- Many countries in the world have closed their borders completely to contain the spread of the coronavirus
- The Pope (Roman Pontiff) walked through the empty streets of Rome over the weekend and prayed for an end to the pandemic
On late Sunday afternoon, The Federal Reserve threw caution to the wind and tapped directly into their “shock and awe” playbook during an emergency meeting—the second such meeting in as many weeks.
Flexing their economic might in a manner not seen since the Financial Crisis (2008-2009), the American central bank slashed interest rates a full percentage point, eliminated bank reserve requirements and announced the start of a new round of quantitative easing.
The dove has officially risen.
With regard to interest rates, the Fed dropped the benchmark federal funds rate to nearly zero, with a new target rate of 0% to 0.25%. Before the weekend, the target federal funds rate was 1.00% to 1.25%.
The federal funds benchmark is the rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis.
In practice, institutions with surplus balances in their account lend those balances to institutions in need of larger balances, and the rate charged for these loans is the federal funds rate. The federal funds rate is therefore a critical benchmark in the global financial markets.
Depository institutions can also borrow directly from the Federal Reserve through what’s known as the “discount window” at the associated “discount rate.” The discount rate is typically higher than the federal funds rate, though on average not by a large margin.
On Sunday, the Federal Reserve urged the nation’s financial institution to use the discount window as necessary, encouraging American bankers to “use their capital and liquidity buffers as they lend to households and businesses” to help combat the negative impact on the economy from the spread of the coronavirus.
Alongside the rate cut, the Federal Reserve also significantly loosened another tool it uses to control monetary policy: bank reserve requirements. Reserve requirements are the amount of funds that financial institutions hold in reserve (as mandated by the Fed) to ensure they are able to meet liabilities in the case of sudden withdrawals.
The Federal Reserve tightens and loosens bank reserve requirements as one of its many tools to control the overall money supply. By eliminating the requirement on Sunday, the Fed further loosened the shackles on financial institutions and urged them to use their complete arenals of capital.
On top of the above, the Fed also announced the start of another round of quantitative easing (QE), which became a popular tool of global central bankers during the Financial Crisis. QE essentially entails large-scale asset purchases, particularly of government bonds, which has the effect of boosting the price of those assets and increasing overall money supply.
Prior to 2008-2009, QE was viewed as a somewhat unconventional approach in the monetary policy playbook. QE is often relied upon when other measures are viewed as inadequate, and such interventions can help eliminate the risk of a recession or reduce the impact of a recession, as well as help ensure that inflation doesn’t fall below the Fed’s target level.
This past weekend, the Fed committed to $700 billion in QE comprising $500 billion in expected Treasury bond purchases and “at least” $200 billion in expected mortgage-backed securities purchases over the “coming months.” The amount announced on Sunday is even larger than the initial wave of QE unleashed in November 2008 to help combat the Great Recession ($600 billion).
Taken together, these moves equate to the Fed essentially raising a gigantic neon sign in the shape of a dove above their headquarters in Washington, D.C.
The committee in charge of such decisions, the Federal Open Market Committee (FOMC), was scheduled to meet Tuesday and Wednesday of this week (March 17-18), meaning this was the second emergency meeting (and rate cut) conducted this year, the other having occurred on March 3.
These represent the first known emergency meetings of the Federal Reserve since the Great Recession.
With volatility also trending to levels not seen since 2008-2009, one would expect big swings in the stock market indexes will continue—as well in the prices of commodities and other heavily traded products, at least in the near-term.
It’s also entirely possible that additional measures will be adopted in the coming days and weeks to help reduce market anxiety, such as the “uptick rule” on short selling or even the outright closure of trading exchanges.
Readers seeking to learn more about how interest rates can affect the stock market may want to review a previous episode of Futures Measures on the tastytrade financial network when scheduling allows.
To learn more about U.S. interest rates and how they compare to the global landscape for rates, another recent installment of Futures Measures is also recommended.
Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about topics covered in this blog post, or any other trading-related subject, to firstname.lastname@example.org.