Read Time: 2 mins
Nikolaj Schmidt, Chief International Economist
Investors fear central banks have reached the limit of their influence
– Nikolaj Schmidt, Chief International Economist
The Fed’s decision on Sunday, March 15, to slash its main policy rate by 100 basis points (bps) and announce at least USD 700 billion in asset purchases was followed on Monday by the Bank of Japan’s announcement that it aimed to double its purchases of exchange‑traded funds to JPY 12 trillion.
Despite these moves, which were without parallel since the global financial crisis, stock markets suffered heavy losses on Monday morning following a weekend of worsening news over the coronavirus. This implies that investors fear that central bank support is close to being exhausted and that a robust fiscal response to the demand shock remains elusive.
Elsewhere, the Bank of Japan temporarily doubled its annual target for equity purchases to JPY 12 trillion (USD 112 billion). The Reserve Bank of New Zealand cut its main policy rate by 75 bps
to 0.25%, and the Bank of Canada cut its benchmark lending rate 50 bps to 0.75%.
The steep declines in equity markets that followed the central bank moves over the weekend indicate that investors fear that central banks have almost reached the limit of what they can meaningfully do to support markets during this crisis. The Fed’s actions over the weekend were bold and may go far toward ensuring that money markets do not break down (which would be a calamity). The true impact of the Fed’s actions will become apparent in the coming days and weeks.
However, the bottom line is that, because this is a health crisis, there are limits to what monetary policy can do to alleviate it. Central bank actions to loosen financial conditions and address market dislocations are necessary, but not in themselves sufficient, to persuade investors to embrace risk assets at this point in time. Banks cannot keep economies afloat by themselves.
This means that it now ultimately falls to governments to provide a convincing fiscal response if market volatility is to be assuaged. Even fiscal policy may not be able to achieve much in the near term other than limiting the financial damage to corporations or households during this enforced period of economic hibernation. While this is obviously important, it may not calm markets immediately as fiscal measures tend to have low multiplier effects.
We believe that a negative fed funds rate is unlikely. The Fed continues to reiterate its aversion to negative rates, saying that they have not been successful in stimulating growth or inflation in the eurozone or Japan. Additionally, negative rates would likely inhibit the US money markets, which are far more critical to the successful functioning of the US economy than money markets and economies in other parts of the world.
However, US Treasury yields could move below zero if demand for safe‑haven assets remains very strong.
– Ju Yen Tan Senior Portfolio Manager, Global Fixed Income
Sign up for US Equity insights from T. Rowe Price
Share this article:
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services.Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any
jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’
accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.
UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks
or registered trademarks of T. Rowe Price Group, Inc.
You might be interested in…
Read Time: 2 mins
Read Time: 4 mins
Read Time: 5 mins
Read Time: 4 mins
See our comprehensive range of US equity funds
Information contained in the T. Rowe Price website is not intended for investors in any jurisdiction in which distribution or purchase is not authorised, including the jurisdiction of the reader of this information, where applicable. For example, the information herein is not for distribution to and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States of America to or for the benefit of United States persons.
Information obtained from this site is intended specifically for the individuals who have agreed to these Terms and Conditions and may not be redistributed without prior consent from the T. Rowe Price Legal department.
The information is designed for professional investors, including financial intermediaries or members of the media, and is published for informational purposes only. In particular, the information is directed at only informing persons falling within one or more of the following categories:
(a) A government;
(b) A bank or insurance company;
(c) A pension fund or charity;
(d) Persons whose ordinary activities involve them, as principal or as agent, in acquiring, holding, managing or disposing of investments for the purposes of a business carried on by them or whom it is reasonable to expect will, acquire, manage or dispose of investments for the purpose of such a business;
(e) Persons whose ordinary business involves the giving of advice, which may lead to another person acquiring or disposing of an investment or refraining from so doing;
(f) Representatives of the media for corporate and background information about T. Rowe Price.
Persons who do not fall into one of the above categories should not act upon the information contained herein.
Certain persons may have access to information regarding the T. Rowe Price Funds SICAV, an investment company incorporated as “Société d’Investissement à Capital Variable” (‘SICAV’) under the laws of Luxembourg and the T. Rowe Price Funds OEIC, an open-ended investment company (‘OEIC’) incorporated in England and Wales. The sub-funds referred to on the site are only offered by the current prospectus. The prospectus contains more complete information about the sub-funds, including investment objectives, charges and expenses. However, the prospectus and other information relating to the sub-funds will not be intentionally distributed to persons in any country where such distribution would be contrary to local law or regulation.
Past performance is not a guide to future performance. The value of securities and any income generated from them might decrease as well as increase. Changes in rates of exchange may also have an adverse effect on the value, price or income of securities. Investors should also be aware of the additional risks associated with investments in emerging markets, high yield securities and smaller companies.
This information herein does not constitute investment advice and the products described may not be available to or suitable for all investors. You should consider, if appropriate, obtaining independent professional advice before making an investment decision.
Unless otherwise noted, the content appearing in this Section of the T. Rowe Price website has been issued by T. Rowe Price International Ltd, 60 Queen Victoria Street, London EC4N 4TZ, which is authorised and regulated by the U.K. Financial Conduct Authority with the reference number 194667.