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Institutional Perspectives

We surveyed Lord Abbett investment leaders for their views on the U.S. Federal Reserve’s policy move on March 15, 2020.

“Extraordinary times call for extraordinary measures.”  In its latest response to the economic and market fallout from the COVID-19 coronavirus outbreak, the U.S. Federal Reserve held true to that maxim on March 15 by announcing a full-point cut in the federal funds rate, along with an additional $700 billion in bond purchases. The move, which brings the benchmark U.S. interest rate to near zero, came hard on the heels of the Fed’s half-point cut on March 3.  Policymakers also detailed measures related to the discount window, intraday credit, bank capital and liquidity buffers, bank reserve requirements, and, in a nod to the global reach of the current crisis, facilitated U.S. dollar liquidity swap line arrangements in coordination with other central banks. (Read the full announcement.)

“The fact that the Fed is acting aggressively, and the world’s central banks, government officials, and political leaders are communicating and collaborating should matter to all risk markets,” says Robert Lee, Lord Abbett Partner & Chief Investment Officer.

As part of our continuing coverage of the current market volatility, we asked Lord Abbett investment leaders to place the Fed’s latest decision in context for investors. Edited versions of their comments follow.

Steven Rocco
Partner & Director of Taxable Fixed Income
The Fed provided more than the market was expecting, including the currency swap line with five other central banks, $700 billion in quantitative easing, the 100 basis point rate cut, and loosening of reserve requirements. That’s a pretty big “bazooka.”

However, in our view, more needs to be done to support funding markets on the corporate bond side--perhaps the 2020 equivalent of financial-crisis era programs such as the corporate paper funding facility (CPFF) in the United States or targeted longer-term refinancing operations (TLTROs) in the eurozone would be timely. I expect to see more fiscal action possibly in coordination with the Fed.    We believe a stimulus of 2% or more for U.S. gross domestic product is appropriate given the magnitude of the expected shock.

The flattening of the COVID-19 infection curve will be what everyone is watching and waiting for. The policy actions on March 15, and others likely in the coming days, will hopefully allow markets to reach that point without any unforeseen accidents.

Giulio Martini
Partner, Director of Strategic Asset Allocation
By supplying liquidity to support the de-risking currently going on in asset markets, the Fed is acting to reduce the negative tail risk that would arise from a breakdown in liquidity. That is a clear positive. But the Fed’s actions do not directly address the risks stemming from the harm to the economy that actions being taken to stop the spread of COVID-19 will inflict.

Since the full extent of these actions is still unknown, we believe it is impossible to price the risks stemming from them. Volatility is likely to remain very high, and risk asset prices are likely to continue to experience downward pressure, until these risks can be properly priced.

Leah Traub
Partner & Portfolio Manager
The Fed’s move is just the latest in a salvo of responses from global central banks since March 9:

 

Central Banks around the World take Action to Infuse Markets with Liquidity
Notable monetary policy actions taken since March 9, 2020

 

Sources:  NewYorkFed.org, March 12, 2020; ECB.Europa.eu, Monetary Policy Decisions Statement, March 12, 2020; BankofEngland.co.uk, Measures to respond to the economic shock from Covid-19, March 11, 2020; BoJ.or.jp, Market Operations toward the End of March, March 13, 2020; bankofcanada.ca, Bank of Canada Announces the Expansion of its Bond Buyback Program and Term Repo Operations, March 12, 2020; rba.gov.au, Reserve Bank of Australia, March 13, 2020; norges-bank.no, Rate Decision 2020, March 13, 2020.

 

None of these actions are occurring in a vacuum, of course. The additional move by the Fed and other central banks to establish dollar liquidity swap lines points to the degree of global coordination that will be necessary to respond to the unfolding crisis.

Focusing once more on the Fed, while its latest move is not an end-all solution for the impact of the COVID-19 virus, it should help provide liquidity to banks, which will then hopefully help transmit the stimulus through the rest of the economy. We believe fiscal policy is still necessary to provide bridges for companies and households as they face cash flow problems over the next few months. We believe this would help the economy come out the other side not too permanently impaired.

 

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