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Economic Insights

Lord Abbett investment leaders explore the potential implications of the U.S. Federal Reserve’s policy move on March 3.

In response to the spreading Covid-19 coronavirus outbreak, and the growing concerns about its impact on economic growth, the Federal Open Market Committee (FOMC), the rate-setting arm of the U.S. Federal Reserve (Fed), announced a 50 basis point (bp) cut in the fed funds rate on March 3, its first inter-meeting move since October 2008. In support of its action, the FOMC said in a statement that while “fundamentals of the U.S. economy remain strong … the coronavirus poses evolving risks to economic activity.” The FOMC added that it “will use its tools and act as appropriate to support the economy.”

What are the implications of this decision for investors, especially as they assess the current volatility in financial markets? We surveyed five Lord Abbett experts for their views:

Steven Rocco
Partner & Director of Taxable Fixed Income
This is the first step by the Fed but probably not the last. I expect other central banks will soon follow with cuts of their own (Australia and Malaysia also cut rates on March 3). We likely will also see a targeted fiscal response in many countries which may be even more helpful than rate cuts alone. While a 50 bp cut will not mitigate the negative effects on the supply chain or potential demand destruction due to a rapidly spreading virus, it will help by keeping U.S. financial conditions easy. The Fed’s timing here was important, as there is downside to waiting for things to get worse—the FOMC would lose credibility and risk having to play catch-up. 

In summary, the Fed’s move on March 3 was a much needed small step, with potentially more to follow, but not an “all clear” for risk markets.  

Andrew O’Brien
Partner & Portfolio Manager, Taxable Fixed Income
The Fed can’t solve the coronavirus problem since it’s not caused by insufficient liquidity in the financial system. But when people feel safe enough to go back to work and get the economy going again, the Fed’s support can ensure that the bounce-back from the crisis is as rapid as possible. Government plays a vital role in ensuring that the spread of the virus is contained, and that’s the most important element in minimizing the virus’s long-term impact on the economy, but it’s important to have the Fed’s assistance in dealing with the potential drag on U.S. growth.

Kewjin Yuoh
Partner & Portfolio Manager, Taxable Fixed Income
There was no doubt in my mind that a cut was coming given what investors were pricing into the fed futures market. And if we’ve learned anything in this post-financial crisis world, it is that what the market wants from the Fed, the market typically gets. There has been a lot of public commentary about the utility of Fed rate cuts in response to a pandemic, but that commentary revolves around markets rather than the fundamental economy; and the rate cuts are certainly necessary for the aforementioned easing of financial conditions and associated support to growth and a rebound after the expected weakness.

The timing of the announcement is very interesting to me. If the intention was to quell recent volatility, then today’s price action (major equity indexes fell in U.S. afternoon trading on March 3, while the 10-year U.S. Treasury yield touched an all-time low) would suggest the Fed got it wrong.  And if rate cuts are intended to be supportive fundamentally to the economy, growth, and a rebound, then the Fed got it right, but that will only be realized over the longer term.

Here are some top-of-mind bullet points about the broader potential implications of the Fed’s move going forward:

  • We may see steeper yield curves as short rates move lower
  • There may be higher market volatility given uncertainty about the Fed’s next moves
  • Historically low mortgage rates may be supportive to the U.S. economy

Thomas O’Halloran
Partner & Portfolio Manager; Leader of Innovation Growth Equity Team
The Fed doesn’t have a pill for the virus, but its rate cut today is a necessary policy response to help contain the economic and market impacts of Covid-19. So, other things being equal, I believe the Fed’s move improves the odds that the equity correction resolves itself. I would expect many more policy responses in the United States and globally in an effort to make sure the virus contagion doesn’t feed upon itself.

Daniel Solender
Partner & Director of Tax-Free Fixed Income
For the municipal bond market, I would echo the sentiment that it is good that the Fed took action just as a sign that they are engaged and focused upon keeping this episode from becoming a crisis. Short-term rates are already pretty low, so it continues the dynamic where the short end of the municipal bond yield curve does not have as much relative value as intermediate and longer bonds. The municipal bond market had positive returns last week (based on the Bloomberg Barclays Municipal Bond Index) as other markets faded so the main focus is upon how investors adjust to lower interest rates and if those lower rates impact demand for muni bonds. So far things remain relatively stable, but going forward, in addition to strength of demand, we will need to watch whether there is any long term market impact on specific credits and sectors. 

Financial advisors can hear the latest views of Lord Abbett experts on the current market by registering for our March 4 webinar, "Volatility: Challenges, Opportunities, and Helping Clients Stay Focused."

 

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