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Fed Will Trap U.S. Economy in Recession With 0% Interest Rates  


caballero
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Earlier today, the market’s confidence that the Federal Reserve will slash its benchmark interest rate target to zero by next week temporarily soared to nearly 95%. But if the Fed cuts interest rates all the way to zero, there’s a real danger of inflation making the financial crisis worse. Because the economy could slip into recession despite monetary intervention with record-low interest rates. Then the Fed won’t be able to raise rates to whip inflation if prices begin to get out of control. That would make the recession worse. Yet it won’t able to keep rates low either to fight the recession. That will hurt a lot of people with high prices.

A nagging question that has festered since the financial crisis is whether the Federal Reserve could save the U.S. from another recession. Would the combination of low interest rates and quantitative easing (buying up massive amounts of bonds with money created out of thin air) work again? Not every economist is so sure. But former Federal Reserve chair Ben Bernanke argued it could in a January paper published by the Brookings Institution. In the paper, “The New Tools of Monetary Policy,” Bernanke addresses the fact that interest rates are much lower now than before the 2008 financial crisis. Interest rates were at 5.25% before the last recession. The Fed’s target rate was 1.75% before last week’s emergency cut by half a percent down to 1.25%.

That doesn’t leave the central bank much room to cut any further to grease the axles and keep the economy’s wheels turning if markets continue to slow down. Ben Bernanke argues the Fed can still achieve the equivalent of 3% in rate reductions through a combination of more quantitative easing and “forward guidance.” When interest rates are low, inflation – the price of goods and services – generally increases. Once there’s no room left to cut interest rates any further, the Federal Reserve will have painted the economy into a corner. The central bank would trap us between an economic Scylla and Charybdis: recession and inflation.

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Nicolas
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The Recession Indicator Everyone’s Ignoring Will Blow the Lid on the ‘Next 2008’

In 2001 and 2009, corporate debt relative to GDP hit 45%. It now exceeds 46%. That’s equivalent to more than $10 trillion. While the U.S. economy has staved off recession under President Trump, growth has waned since the administration’s tax cuts were implemented in 2018. The U.S. economy has expanded more than 2% in each of the last four quarters, but has only exceeded 3% annual growth once over that period (and that followed an abnormally weak Q4 2018).

President Trump has promised an emergency fiscal response to revive plunging stock markets and a cooling business climate hit hard by coronavirus. This includes the possibility of payroll tax cuts and medical leave for hourly employees. So far, the only immediate response from government has been an emergency interest-rate cut by the Federal Reserve. One of the many downsides of ultra-loose monetary policy is it encourages the same reckless behavior that allowed corporations to sell record amounts of bonds at historically low interest rates.

With the number of confirmed coronavirus infections surging past 116,000, many economists expect global GDP to flat-line this year. The Institute for International Finance said last week global GDP growth could be as low as 1% in 2020. Meanwhile, Rabobank said Tuesday that a “global recession is now all but certain.” If debt continues to grow as the economy slows, a new cycle of spending cuts and layoffs could ensue. Credit downgrades could lead to higher borrowing costs even in a favorable interest-rate environment.

Even if the Fed lowers interest rates (and it will), the corporate debt bomb could still explode as the economy grinds to a halt. Coronavirus may render the Fed’s conventional policy tools obsolete, if record consumer and business debt haven’t done so already.

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Nicolas
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Stimulus hopes pull stocks back from abyss

Japan’s Nikkei fell 10% before paring the drop to close 6% lower. Australia’s S&P/ASX200 had its wildest trading day on record, falling past 8% before surging in the last minutes of trade to settle 4.4% higher after the close. MSCI’s broadest index of Asia-Pacific shares outside Japan wobbled 0.1% higher by late-afternoon after being down more than 5% during the morning. It remains set to end the week 11% lower, the biggest drop since 2008.

The turnaround came as central banks from the United States to Australia pumped liquidity into their financial systems and as hopes grew that U.S. Democrats and Republicans could pass a stimulus package on Friday. It was not clear if the late market moves signalled a recovery in the dire sentiment that has wiped some $14 trillion from world stocks in a month and had Asian markets in freefall at the open.

“It’s like a deja vu of what happened in 2008 but of course the reasons are very different. In 2008, the banks were broken, financial markets were frozen,” said Hou Wey Fook, chief investment officer at DBS Bank. “This time, there are some areas where liquidity has dried up like in bonds but not to the same extent as in 2008.”

Gold and oil had steadied, but the bond market still bore the scars of the morning’s widespread plunge after the Dow Jones posted its worst drop since the 1987 Black Monday crash. In the somewhat calmer currency markets, the dollar held its ground as investors nervous about systemic risks drove demand for the world’s reserve currency. Majors stabilised after furious dollar buying overnight, with the euro finding footing around $1.1200 and the Aussie recovering to $0.6300.

Emerging market currencies were punished: the won and baht dropped as far 1% and the rupiah 2%. The plunge, as the coronavirus pandemic spreads, gathered pace after U.S. President Donald Trump spooked investors with a move to restrict travel from Europe, and after the European Central Bank disappointed markets by holding back on rate cuts.

The VIX volatility index – Wall Street’s “fear gauge” – and an equivalent measure of volatility for the Euro Stoxx 50 .V2TX hit their highest since the 2008 financial crisis. In commodities, Brent cruderose 1.9% to $33.84 a barrel after falling more than 7% on Thursday. U.S. crude gained 2.4% to $32.26 per barrel.

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caballero
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Federal Reserve cuts rates to zero and launches massive $700 billion quantitative easing program

Facing highly disrupted financial markets, the Fed also slashed the rate of emergency lending at the discount window for banks by 125 basis points to 0.25%, and lengthened the term of loans to 90 days. Despite the aggressive move, the market’s initial response was negative. Dow futures pointed to a decline of some 1,000 points at the Wall Street open Monday morning. The discount window “plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy … [and] supports the smooth flow of credit to households and businesses,” a separate Fed note said.

The discount window is part of the Fed’s function as the “lender of last resort” to the banking industry. Institutions can use the window for liquidity needs, though some are reluctant to do as it can indicate they are experiencing financial issues and thus sends a bad message. The Fed also cut reserve requirements for thousands of banks to zero. In addition, in a global coordinated move by centrals banks, the Fed said the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank took action to enhance dollar liquidity around the world through existing dollar swap arrangements. The banks lowered the rate on these swap line loans and extended the period for such loans. The actions by the Fed appeared to be the largest single day set of moves the bank had ever taken, mirroring in many ways its efforts during the financial crisis that were rolled out over several months. Sunday’s move includes multiple programs, rate cuts and QE, but all in a single day.

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Nicolas
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Global recession is inevitable: Morgan Stanley

The U.S. stock market is set to drop 5% at open, as the Dow Jones Industrial Average (DJIA) futures indicate a 1,000-point drop. The gloomy pre-market data comes after analysts issued a stark warning that China will not be the savior of the global economy this time. In contrast to the Federal Reserve and many of Europe’s central banks, the People’s Bank of China (PBoC) is taking a more conservative approach in introducing financial stimulus.

China has consistently been cautious in releasing large stimulus packages in recent years, even when the trade dispute with the U.S. worsened in 2019. The decision of the PBoC to limit further easing of its fiscal policies come down to the focus of the nation’s policymakers on long-term economic stability. China already has a large national debt, and the South China Morning Post estimated the country’s total debt to be around $40 trillion.

Given the large debt of China and the conservative approach of Beijing towards issuing large-scale stimulus, strategists warned that China is unlikely to issue significant stimulus packages in 2020. As the Dow Jones is set to open below 20,000 points for the first time since May 2017, major financial institutions in the likes of Goldman Sachs and Morgan Stanley said that a global recession is inevitable at this point. Economists at Morgan Stanley said that the strong response from the Federal Reserve will slow down the downtrend of the stock market. But, as long as the coronavirus pandemic continues to expand, the economists said that it will “shock” the global economy.

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Nicolas
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Trump Stimulus Won’t Save the Dow Jones From Crashing Below 20,000

The number of confirmed U.S. coronavirus cases officially stands at 4,226, and several states risk succumbing to Italy-style outbreaks. Against that backdrop, Chantico Global’s Sanchez warns that no amount of stimulus will rescue the stock market from this panic-driven sell-off. Only actual progress in containing the virus can do that. So as the Fed slashes interest rates to zero and the Trump administration scrambles to send cash payments to Americans, Sanchez expects them to have a minimal impact on the Dow Jones.

She said on Squawk Box Asia: This isn’t a monetary crisis. So, bringing in a monetary tool—while it can’t hurt—can’t necessarily help. What we need to hear is that the virus is contained and no amount of fiscal stimulus will help that.

She further warned that the U.S. may start to see a no-end-in-sight scenario where the effect of coronavirus containment policies on the economy and the Dow Jones will impose dire consequences down the line. The strategist explained: The element of slowing the spread or stopping the spread or creating containment is one element, but the reality is that the policies we are instituting in order to do that are basically causing an economic lockdown. And that in itself will have a significant effect that could be more than just short-term.

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Nicolas
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Stocks, oil sliding again in ‘irrevocably changed’ markets

Global stocks stumbled back into the red on Wednesday with Wall Street futures pointing to more losses ahead as fears over the coronavirus fallout eclipsed large-scale support measures rolled out by policymakers around the globe. Some traditional safe-haven assets such as gold were also under pressure as battered investors looked to unwind their damaged positions.

Oil prices fell for a third session with U.S. crude futures tumbling to a 17-year low. “Another remarkable day in what is clearly fin-de-regime,” Rabobank’s global strategist Michael Every wrote in a note. “Things have already irrevocably changed and whipsaw market action reflects that this is the case. The only issue is how much further they change from here, and hence where markets settle.”

European equity markets suffered hefty losses with London and Frankfurt down 3.5% in early trade while Paris and Milan slipped around 3%. The falls in Europe followed losses in Asia where MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 3.8% to lows last seen in summer 2016, led by a 6.4% fall in Australia. Japan’s Nikkei erased early gains to dip 1.7%. MSCI’s global stocks index dropped 1%.

Losses were set to extend to Wall Street with U.S. stock futures indicating as much as 4% lower and hitting their daily low limit just a day after the S&P 500 rose 6% and Dow Jones rose 5.2% or 1,049 points. “A rise of 1,000 points in Dow is something you see only during a financial crisis. It is not a good sign,” said Tomoaki Shishido, senior fixed income strategist at Nomura Securities.

Britain launched a 330 billion pounds ($400 billion) rescue package for businesses threatened with collapse while France, which went into lockdown on Tuesday, is to pump 45 billion euros ($50 billion) of crisis measures into its economy to help companies and workers. Still, forecasters at banks are projecting a steep economic contraction in at least the second quarter as governments take draconian measures to combat the virus, shutting restaurants, closing schools and calling on people to stay home.

Tuesday saw also the U.S. Federal Reserve step in again to ease funding stress among corporates by reopening its Commercial Paper Funding Facility to underwrite short-term corporate loans.

In Europe, speculation grew around the issuance of joint euro zone “coronavirus” bonds or a European guarantee fund to help member states finance urgent health and economic policies.

Italian government bonds gained some respite after several sessions of relentless selling, with yields falling between two and six basis points across the curve. Benchmark U.S. 10-year Treasury yield edged up to a fresh three week high of 1.2080 after the Fed move eased some market jitters, while U.S. 30-year bond yields climbed as high as 1.8380%.

In currency markets, the safe-haven yen gained sharply while the dollar held onto hefty overnight gains against other currencies. The dollar slipped 0.1% against the yen to 107.53 yen while the euro stood at $1.0971. The dollar index against a basket of currencies stood at 99.699, up 0.12% on the day. Oil prices fell as the outlook for fuel demand darkened with travel and social lockdowns triggered by the coronavirus epidemic. U.S. crude was down 84 cents, or 3.12%, at $26.11 a barrel by 0822 GMT, having earlier fallen to $25.83 a barrel, the lowest since May 2003.

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Nicolas
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Central banks in Asia have room to cut rates and may ride out the coronavirus crisis better than the West

Investors hunting for safe spots to park their money should look to Asia now amid the current pandemic, analysts said, highlighting that the region is much more prepared economically to ride out the current crisis compared to the West. Additionally, the virus appears to be more contained in Asia now, while it’s still running its course in the West, according to Morgan Stanley.

Countries in the U.S. and Europe are scrambling to contain the pandemic, with entire states and cities locking down. The worst-hit countries in Europe, such as Italy and Spain, have seen cases surging to tens of thousands while infections in the U.S. spiked tenfold in a week to cross 50,000.

Severe outbreaks are not new to countries in Asia. The latest coronavirus outbreak has often been likened to the SARS epidemic in 2003, which hit mainland China, Hong Kong, and Singapore particularly hard, and plunged their respective economies into recession. That led governments to position themselves strongly for the next disaster.

Governments in the region have also learned quickly from China’s response to the outbreak. “China’s response to the coronavirus crisis has taught the world key lessons on the way forward: contain first, then stimulate,” said New York City-based asset manager PineBridge Investments. “Already Asian governments like Hong Kong, Singapore, South Korea, the Philippines, and Malaysia have taken various forceful measures of containment, and that bodes well for the market recovery.”

Central banks in Asia have room to cut rates
Global interest rates are already low, with some countries already in negative territory. But central banks in Asia generally have more ammunition to cut borrowing costs to support their economies, compared to their U.S. and European peers, analysts suggested. That implies that Asian central banks have more room to use monetary policy to boost their economies.

Central banks in the U.S. and Europe could be running out of tools, analysts have pointed out. The Federal Reserve had reduced the rate three times in 2019 for a total of 75 basis points. It then slashed rates to essentially zero in March, after two additional emergency cuts. Rates at the European Central Bank are already negative.

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mgtow
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Looks like we are facing couple hard years at least

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Nicolas
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White House predicts 100,000 to 240,000 will die in US from coronavirus

The U.S. has more coronavirus cases than any other country across the globe with 184,000 confirmed infections, according to data compiled by Johns Hopkins University. New York has now become the new epicenter of the outbreak in the world with 75,795 confirmed cases as of Tuesday morning, more reported infections than China’s Hubei province where the coronavirus emerged in December.

Trump, who grew up near New York City’s Elmhurst hospital in Queens, said no one can believe officials are setting up refrigerator trucks as temporary mortuaries outside the hospital. Trump said New York “got a late start” in rolling out its mitigation efforts. There are very few fatalities among young people in the U.S., Birx said, citing similar results in Italy and elsewhere in the world. People with underlying conditions are also at greater risk of death, scientists say.

Earlier Tuesday, the Centers for Disease Control and Prevention released preliminary data showing that people with diabetes, chronic lung disease, heart disease or those who smoke may be at increased risk of developing severe complications, even death, if they get infected with the coronavirus. The death projections “are very sobering, and when you see 100,000 people, and that’s a minimum,” Trump said. “A hundred thousand is, according to modeling, a very low number.” The death toll would be even higher without any mitigation measures with some estimates as high as 2.2 million fatalities, Trump said.

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