Understanding the Fed’s Weekend Actions and Stock Market Reactions (03/16/2020)

What the Fed Did

The Federal Reserve (the Fed) made some significant moves the past several days in an effort to stem the panic currently flooding the markets. We want to take a few moments to explain what they’ve done, why the moves were necessary and what might happen next.

Last week, the Fed reduced its target interest rate by –0.5%, aiming to boost economic activity and stabilize markets. As the scope of the coronavirus pandemic became clearer, equity securities around the globe continued on a downward trajectory, reacting to the likelihood that there will be a vast impact on world economies and corporate earnings.

This past weekend, the Fed announced that it was again cutting its target rate down, this move to zero, as it previously did in the financial crisis of 2008. It also announced a bond-buying program, committing to purchase $500 billion of U.S. Treasurys and $200 billion of mortgage-backed securities over the coming months. They also encouraged banks to use their direct “lending window,” which lets banks access the needed funds to cover deposit reserves day to day. Central banks around the world are back in sync, also deciding to cut interest rates and expanding bond-buying programs.

Economic Impact of Coronavirus Still Unclear

Stock markets are still uncertain of these fiscal stimulus measures and have not rallied accordingly; in fact, they are doing the opposite by currently selling off. The general belief is, until the health concerns caused by COVID-19 are under control, there is no way for investors to forecast precisely what the impact on the economy and on companies will be in the short term. The gyrations of stock prices reflect the struggle to predict what may happen next and how markets will react.

We believe that the economic impact on the U.S. economy will be significant in the short term, but we can’t predict the exact effect on gross domestic product or say how long into future quarters it will last. The coordinated central bank response is an important start and surely prevented the worst-case scenario of markets seizing up in the same manner as they did in 2008.

We are also reassured by the (bipartisan) actions of U.S. leadership. State and regional governments are taking new measures daily as they try to contain the spread and give hospitals the capacity to handle the worst cases. There is some possibility that the economic impact will be limited to the second quarter. A relief package is in process, with President Trump’s administration and Congress working together to enact legislation to directly support consumers.

Was It Enough? What More Can Be Done?

In such major economic shocks, time will tell if the Fed’s recent actions will stabilize the markets, but there’s only so much it can do. Chairman Powell and his governors do have some additional tools to boost liquidity and provide funding to severely impacted sectors of the economy; possibly the airlines, health care sector and small/medium businesses. We also would like to point out that the drop in oil prices, a contributor to market volatility, actually helps U.S. consumers. It acts as a tax cut. We are also reassured that the economy started this crisis in a very strong state.

What We’re Thinking Now

Declines of this sort — the unforeseen, extremely volatile kind — are never easy to live through. It’s crucial to take the long-term view. An external shock like this can pressure the economy, but we believe it will be resolved over time.

With a long-term view, we try to use these difficult days to look for opportunity and value. We continue to evaluate our current holdings as the environment shifts.

Most importantly, we want our shareholders to know that we remain calm and clear-eyed in our decisions, aiming to make the best long-term choices to protect and grow their savings.

For the latest updates, please visit our website.

Best,

Mark Santero

Gross Domestic Product (GDP) is the monetary value of all finished goods and services made within a country during a specific period.

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Homestead Funds’ investment advisor and/or administrator, RE Advisers Corporation, and distributor, RE Investment Corporation, are indirect, wholly owned subsidiaries of NRECA. RE Investment Corporation, Distributor. 03/20