Why did the Federal Reserve’s ‘big bazooka’ misfire today? Panic and fear still hold sway

Stock markets took yet another big dive today despite a dramatic intervention from the world’s most important bank last night.

The FTSE 100 was trading down more than 7 per cent but that has eased to down 4.35 per cent, while other top European share indices also sank. In early US trading, the S&P 500 is down 5.7 per cent and the Dow Jones is down 6.4 per cent. 

Yet, in cutting interest rates in America by 1 per cent to a range of 0 to 0.25 per cent and promising to buy at least $700bn of bonds, the Jerome Powell-led Federal Reserve has shown it is willing and able to support the US and global economies.

The package is comprehensive, well-conceived and provides vital liquidity to the financial system to ease the strain imposed by the dramatic turn of events over recent weeks.

Former European Central Bank boss Mario Draghi famously coined the phrase ‘whatever it takes’ and although Powell didn’t use those exact words the same sentiment was there last night. 

So why have investors resumed selling down their holdings rather than seeing the Fed move as a reason to jump back into the market and start buying up stocks while they are going cheap?

There are many complex reasons for this but essentially it boils down to two broad areas. 

First and foremost, there is simply too much panic and fear in markets at the moment, because nobody yet knows the full extent of the virus crisis.

Until some reliable indicators that the worst of the outbreak has passed emerge, it is hard for markets to accurately price assets or for anybody to feel sure about buying shares.

The second issue is that it is primarily non-financial companies that need support at this stage rather than banks. Airlines in particular, but also retailers and all manner of other consumer-facing businesses.

It is still unknown to what degree the Fed’s cash will make its way through to the wider economy and many experts believe direct intervention from governments is what is required rather than central bank moves.

That is not to say that monetary stimulus is the wrong thing to do, just that it is not enough on its own.

It is vital for the global economy that bond markets are stabilised and US dollar liquidity is available in the financial system. These are the foundations on which a wider recovery can be built over time.  

Kevin Doran, chief investment officer at AJ Bell noted: ‘Cutting rates to zero and unleashing another wave of QE may seem like a shock and awe move, but it’s the playbook from a different crisis.’ 

‘What’s needed is a mechanism that delivers debt forbearance until such time that the economic world starts to spin on its axis again. The Fed is fighting yesterday’s war.’

The timing of the announcement was also misguided according to some.

‘Following the emergency cut in interest rates by the Federal Reserve on 3 March, I said I could not believe they had announced it the day after the Dow Jones had rallied a thousand points,’ said David Roberts, head of the Liontrust Global Fixed Income Team. 

‘No surprise, then, that a worried market subsequently fell – and big time.’

‘Well, the Fed has done it again. This is twice now that the ivory tower boys and girls at the Fed have badly mis-timed purported shock and awe. This is twice that recovering markets have been spooked by ’emergency policy, what do they know that we don’t’ responses from the US Central Bank.’

‘And as for doing it when the US market is shut – what nonsense,’ Roberts continued. ‘Markets rallied on Friday as people worked out that, in part, a much-maligned ECB president Christine Lagarde had helped to force Europe to engage in fiscal policy. 

‘Fed Chair Jay Powell and co, much vaunted, have once again made it easier for Trump and the divided Americans to dither in the eyes of the market and to delay an adequate response.’

‘I hope I’m wrong and that by the time you read this the 5 per cent loss on S&P futures has turned around. I hope I am wrong and that we hear concrete US plans for fiscal expansion this week. I fear I am not.’