NN IP: New Fed measures highlight demand for fiscal policy

NN IP: New Fed measures highlight demand for fiscal policy

Monetary policy
Beursvloer (02)

On Sunday evening the Federal Reserve announced a series of dramatic measures, cutting rates to almost zero and launching a huge quantitative easing programme. According to NN Investment Partners (NN IP), to put these measures into perspective we must bear in mind that in recent decades markets have focused mostly on central banks’ task of setting monetary policy. In other words, their ability to push the safe Treasury yield curve lower and flatter. Given the current position of this yield curve, this policy instrument would seem to have become largely impotent.

In a recent article, Willem Verhagen, Senior Economist Multi Asset and Patrick Moonen, Principal Strategist, comment: “Despite their monetary impotency, central banks can still act as lenders of last resort to the financial system and the government. In this respect their firepower is theoretically unlimited. The problem is that in practice it may run into political constraints, which is what happened last week when the ECB gave only a vague commitment to keep peripheral spreads low. This problem is now also arising for the Fed as its ability to stabilise credit markets faces legal constraints.”

In short:

  • Federal Reserve announces surprise rate cut and quantitative easing programme
  • Fed’s ability to stabilise credit markets is hamstrung by legal constraints
  • Rout on financial markets continues as measures fail to quell investor uncertainty