Fed Surprises Market with a 100bp Cut.
Travis LaMar, Managing Director, Capital Markets
March 15 2020
The past few weeks have been trying times affecting our lives and the financial markets. Our thoughts and prayers go out to those individuals and families across the globe whose health has been directly impacted by this virus.
We are closely following actions that seek to slow the spread of COVID-19, which the World Health Organization has declared a pandemic. Those responses include difficult, unprecedented and sometimes uncomfortable political policy and monetary decisions. For its part the US Federal Reserve made another surprise announcement today, the second such meeting and financial market intervention ahead of a regularly scheduled March meeting. Broad measures taken by the Fed to combat the recent dislocation and volatility include:
- Cutting rates by a full 1 percent to near zero
- Increasing bond buying program (including MBS) by $700 Billion
- Expanding access to the discount window
- Expanding dollar swap lines in alternative currencies
In Powell’s post cut press conference he suggested that below zero would not be appropriate (reflecting a lower bound on front end rates). Notably Powell also mentioned that the Fed lacked the tools necessary to help individuals or Small Business (more on this later).
As your trusted MSR advisor, we at Blue Water have had steady inquiry on different ways to approach valuing, trading or managing MSR portfolios. Our prevailing advice is to REMAIN CALM AND REMAIN DISCIPLINED. Adhere to your risk policies and do not make abrupt changes to financial models or risk positions. Now is not the time to panic and shift everything into safe haven assets. Now is likely also not the time to seek out large ‘relative value’ opportunities.
Financial market responses to abrupt (if necessary) political and monetary policy decisions have a tendency to be extreme and are difficult to predict, particularly in the early stages of crisis. Past crises have taught us that calm and discipline is the right approach. This too shall pass (see Blue Water post regarding what the option market is telling us).
For our part, we at BWFT will watch for a number of additional potential policy actions that seek to address the malaise affecting markets, the disruption to peoples’ everyday lives and the Global Economy. Following on chairman Powell’s news conference we believe that the US Government will likely provide additional guidance / stimulus along the following key avenues.
- Increased likelihood of nation-wide curfew – we believe that this will stem the spread of the disease.
- Programs to assist Small businesses – we believe that this will help blunt the sharp drop on economic activity
- Potential for 401k cap lift – we believe that this will help stem the drop in risk-seeking assets (high yield credit and equities)
- Payroll Tax Holiday – we believe that this will provide stimulus to small business and employees alike
As these policies, or alternate policies seeking the same outcomes, are implemented and we see the resulting decline in the rate of the spread of the virus and reduction in the volatility in markets, only then is it possible to make good, informed investment decisions grounded in sound fundamental and technical analysis.
Until then, stay the course…..This too shall pass.
Contact Information
Alan Qureshi, Managing Partner
aqureshi@bluewater-fintech.com
Travis LaMar
Managing Director, Capital Markets
tlamar@bluewater-fintech.com
Jason Sweeney, COO
Head of Business Development
jsweeney@bluewater-fintech.com
Josh Freivogel, Head of Product