The first cut was a half percent (50 basis points) and the second cut was a full 1% (100 bps) this past Sunday. What is called the ‘Federal Funds rate’ is now essentially zero. That’s the interest rate that large banks charge one another for overnight loans.
Unfortunately, these moves by the Fed have not calmed the markets as we saw in the stock market devastation of Monday, and its nearly 13% decline. So far today, the market has climbed back somewhat, perhaps under the belief that the pendulum swung too far negative in recent days.
With supply chains of many industries in turmoil, the companies relying on their goods have less to sell and are at risk of not being able to pay their bills (simplistically speaking).
The Fed is bringing out another weapon from its arsenal. It’s called a Special Purpose Vehicle (SPV). The SPV is setup to buy 90 day commercial paper (i.e. short term notes) issued by large companies. In so doing the U.S. Government is injecting huge amounts of cash into our financial system that will be available to businesses of all sizes. Many businesses and households will need short to medium term low interest loans just to survive.
At this point there is little or nothing else the Federal Reserve can do to instill calm in the economy. The next step is up to the Congress.
The stimulus package being constructed could be as much as $850 Billion. It could include direct cash payments to Americans, support for small businesses, and financial aid to the airline industry (nobody is calling it a bailout yet), and potential tax cuts. The intention is to flood so much cash into the economy that it has a stabilizing effect. In addition, there is another $100 Billion package passed by the House intended to support paid sick leave, and other benefits for displaced workers. Let’s hope the Congress and White House get together and agree to fund a package today.
The President said the airline industry needs help and, “this is not their fault…”. I agree they desperately need help because this country couldn’t survive without a robust and competitive airline industry. As far as fault, well, it is at least partly the fault of some of the major airlines. In the last few years they have been using their excess cash reserves to buy back stock in their companies instead of building a rainy day fund for the inevitable next crisis, like COVID-19.
Some clients have been asking if it’s time to buy. I say, ‘not yet’. What I want to see is a couple of days in a row of stability in the markets. That could be a few days of zero, slight, or even large gains. Two in a row would be nice but still not a screaming call to buy. it may be an indication that panic selling is lessening.
The Dow was up over 1,000 points (5.2%) today, probably on optimism of a robust fiscal stimulus package. There’s our first day.
Here’s to a Day 2!
Ron
