Coronavirus: Two Federal Reserve Changes Summary (Quick Read)

March 16, 2020

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Wanted to update folks regarding some changes that have taken place. My goal with this blog is not to answer every question, but give you a quick summary of the event. If you would like more information I always recommend the Wall Street Journal or Financial Times.

Fed Injects $1.5T Into Economy

This seems to me to be the most misunderstood action that has been taken. The Federal Reserve operates in what is known as the Repo Market. The repo market exchanges cash for a rough equivalent value in Treasury securities (usually). It exists to promote liquidity and allow companies to exchange their held securities for very cheap cash often at the Federal Funds Rate. 

This allows for overnight or short term loans to companies and keeps the economy liquid. Meaning that as companies need very short term loans of 3 months or less they have access to the repo market for short term funding. The action is an attempt to further facilitate these transactions and coupled with the lowered interest rate encourage more risk taking in the markets (ie. offset the increased risk from coronavirus).

The reason this action is trying to be construed with giving wealthy(ie. stockholders) more money is that it directly improves the asset market. Assets are typically held by wealthy people. To not inject this money into the repo market could risk illiquidity which would cause a trickle down effect that would result in massive layoffs, etc. 

Further Reading:

Federal Reserve Announcement

WSJ Article

Fed Lowered Interest Rate (Not Mortgage Rates)

The Fed also announced a lower interest rate. This is the rate that the Fed Reserve uses with 24 direct parties (large financial institutions). This was also coordinated with several international banks to lower the interest on currency swaps. I do not expect mortgage rates to improve. There is too much uncertainty in the market. This lowered interest rate further helps the repo market action above by further cutting interest rates over the short term. 

This is the first time the Fed has aggressively cut rates twice in between meetings. 

Further Reading:

Federal Reserve Announcement

WSJ Article

The Best Video That Explains the Economy

If you are interested in the economy further then I encourage to watch this 30 min video by Ray Dalio. It's fantastic.

Conclusion

Hopefully that gives you a brief talking point summary of what has transpired over the weekend. I don't not expect any of these activities from stopping a recession. What the Fed is trying to do is relieve panic. Believe me I don’t know exactly what is going to happen next. Caution is to be exercised and if possible consider lowering leverage across assets. Get ready for some great buys once this begins settling out. We are ready to buy some real estate while it is on sale.

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