InvestNow News – 5th Mar 20 – Harbour – Surprise cuts necessary, but not sufficient
George Henderson – Mar 4, 2020
Key Points
- Overnight, the US Federal Reserve executed an out-of-cycle 50 basis point cut as financial conditions have deteriorated sharply over the last week.
- The closed circuit of declining confidence driving lower risk appetite, leading to increased financial stress and back to declining confidence, can be broken by government fiscal policy and monetary policy stimulus.
- We expect a concerted global effort across governments and central banks to support economic growth. New Zealand will be part of that effort.
What will this achieve?
Financial conditions have deteriorated sharply over the last week. The US S&P index fell 15.8% from the record highs seen in February, though a bounce now leaves it down 11.5%. Borrowing costs of lower quality loans in the US have risen by 0.8%.Cuts in interest rates will obviously have no effect on the public’s health. However, there are large economic uncertainties that the supportive action by governments and central banks can partially mitigate.
A lack of confidence poses an imminent risk.
Specifically, sharp declines in consumer and business activity, as individuals are either forced to quarantine or choose to do this themselves, has occurred in China and is a likely outcome in other regions. This reaction, accompanied by a lack of business and market confidence, reduces activity and creates financial stress, leading to increased defaults and bankruptcies.