FedmovesandDepressioneraeconomics

Exceptional times call for exceptional responses and by any stretch of imagination these are the exceptional times. The most exceptional event of yesterday though was the praise showered by the US President on the Fed Chief Jerome Powell. US President has constantly accused Fed for being slow and naïve for the better part of last two years, he was especially crossed when the Fed ventured into the rate hiking cycle and stock markets tumbled. Another constant grouse has been that all the other countries are enjoying zero rate of interest and why US should be any different. Finally US President said that Powell is doing a good job.

The praise is not without reason, since the beginning of March when the potential impact of virus started to appear, Fed has moved fast in cutting rates and providing umpteen measures to keep the credit flow moving. The discussion around the virus impact have moved from a slowdown to a recession and then to a full fledged depression. Fed officials themselves have spoken that they are seeing massive job losses in future as the economic activity has grinded to a halt.

As soon as the word depression is uttered it conjures up the images of destitute families, deserted factories and desolate faces from the era of 90 years back. The imagery is so strong and visceral that no policy official wants to have a repeat of the same. Hence we see such an urgency in the response. The interesting bit here is that the GFC era Fed Chief Ben Bernanke had done is doctoral thesis on the topic of depression era economics. During his time in midst of GFC Fed had loosened its purse strings through multiple QE’s and zero rates, the theoretical foundation of the action was Bernanke’s belief that the 1930’s depression was actually a policy failure as the policy makers of that time failed to stimulate enough. It is not difficult to understand that why he was later anointed with the sobriquet of Helicopter Ben.

Now lets see what all Fed has done yesterday. FOMC has expanded its large scale asset purchase program by promising to purchase “in the amount needed”. Earlier it had said that it will purchase USD 500 bn of treasury securities and USD 200 bn of agency mortgage backed securities. Fed also announced that it would buy the corporate bonds and loans in the primary and secondary markets. In effect close to any asset if the bank has Fed is willing to provide it an exit and liquidity. The markets which went positive on the announcement went into red by closing. Dow jones closed 3% down. Market spirits may have been dampened by the uncertainty on the contours of relief package which is still stuck in senate.

US 10 year yields are moving mostly unchanged with dollar index trading a shade lower. Indian rupee trades above the 76 levels having touched a life time high of around 76.30 yesterday. On the FPI front there was an outflow of close to 5000 Cr INR yesterday adding to the 97000 Cr INR number in March. As the country moves into a critical phase regarding the fight against the virus with lockdowns and closures, the number of new cases in coming weeks would determine the health of general population as well as financial markets.