Extreme Measures by US Fed: Will Asian Markets Show 'Late-Stage Strength'?

US Stock Market Closes Lower... Asian Markets Start Higher
Dollar Weakens... Bond Market Stabilizes
US Government Stimulus Needed to Expand Impact

[Asia Economy New York=Correspondent Baek Jong-min] As the New York stock market declined, all efforts by the U.S. central bank, the Federal Reserve (Fed), failed to show results. Despite taking three extreme measures this month, including two interest rate cuts and unlimited quantitative easing, the response from the New York stock market was cold. However, with the Asian markets opening later and showing an upward trend, there is an interpretation that the Fed's unlimited quantitative easing policy might be gaining momentum.

Local U.S. media gave the Fed's announced measures a strong policy evaluation but remained cautious about their effectiveness. On the 23rd (local time), The New York Times (NYT) only reported that "the Fed added new prescriptions to the remedies used during the global financial crisis to maintain liquidity in the funding markets."

[Image source=Reuters Yonhap News]

Although the Fed is escalating its measures to respond to the novel coronavirus disease (COVID-19) crisis, questions remain about their effectiveness. This month, the Fed lowered the benchmark interest rate twice to near zero (0) and then employed the quantitative easing (QE) tool that was used to stabilize financial market turmoil during the global financial crisis. On this day, the Fed expanded the QE purchase targets to include not only existing government bonds and mortgage-backed securities (MBS) but also corporate bonds, aiming to extinguish the wildfire spreading through the financial markets.

However, the Fed's commitment to economic stimulus is viewed positively. The Fed emphasized its stance to "take all necessary measures to support American households, industries, and the overall U.S. economy," and announced the addition of the so-called 'Main Street Business Lending Program' to support loans for small and medium-sized enterprises. CNBC described this as the beginning of a new phase of 'money printing.' Furthermore, just like former Fed Chairman Ben Bernanke, who was nicknamed 'Helicopter Ben' for purchasing $4.5 trillion in assets, current Chairman Jerome Powell is interpreted as showing no hesitation in distributing cash.

The media's cautious judgment on the effect of the money supply on this day was relatively accurate. The Fed's measures were unprecedented, but the results were not remarkable. However, the yield on the U.S. 10-year Treasury note plunged by 0.16 percentage points to 0.77%. A decline in bond yields means a rise in bond prices. Until early this month, U.S. Treasuries, which were very strong due to safe-haven demand, experienced turmoil as dollar demand increased, making them a target for disposal and causing yields to spike. The bond strength on this day is seen as reflecting expectations for the Fed's unlimited quantitative easing.

The soaring dollar value also stabilized. The dollar index, which shows the value of the dollar against six major currencies in the New York foreign exchange market, fell slightly by about 0.1%. As the demand for dollar liquidity decreased and bond prices stabilized, there is hope that financial market turmoil may diminish. Gold prices also rose by about 5%. The Asian stock markets are reflecting a belated positive evaluation of the Fed's stimulus measures.

Brent Schutte, Chief Investment Officer at Northwestern Mutual Asset Management, said despite the U.S. stock market decline, "The Fed's choice was timely. However, fiscal policy support is necessary." He argued that "the longer the wait, the greater the anger," and urged the government to quickly finalize economic stimulus measures.

The Wall Street Journal (WSJ) pointed out that the issue lies more with the U.S. political situation than the stimulus measures themselves. WSJ stated, "The spread of COVID-19 and the failure of the U.S. Congress to pass a stimulus package diluted the Fed's decisive actions." This implies that while government bailout funds are urgently needed, the measures introduced by the Fed are insufficient to put out the immediate fire.

This content was produced with the assistance of AI translation services.