In March, the Federal Reserve Open Market Committee cut overnight interest rates back to the zero lower bound, embarked on a massive QE program, and re-launched (and subsequently doubled down on) financial crisis-era lending programs.
Faced with an extremely rapid drying in market liquidity, Powell’s Fed acted aggressively, and, four weeks after the last major announcement, the markets appear convinced. While the proximate cause of the rate cuts was, of course, the economic pain wrought by the Covid-19 crisis, the ultimate market plumbing problems that exacerbated the financial downturn and necessitated extreme stimulus measures had been building for about two years. We began writing extensively on the topic throughout 2019 and into early 2020. The message today is that the Fed believes it has addressed those plumbing problems, but will do more if other issues emerge.