Forex discusses coordinated central bank intervention

Jerome Powell's fiery speech extended a helping hand to the US stock indices, but did not save the US dollar. Investors are actively playing out the idea of ​​a deeper reduction in the Fed rate on federal funds compared to ECB rates. Rumors about the weakening of the monetary policy of the Federal Reserve at an extraordinary meeting add fuel to the fire. Donald Trump wonders why Powell is so slow, and Goldman Sachs and BofA Merrill Lynch believe that at the FOMC meeting on March 17-18, borrowing costs will fall not by 25, but by 50 bp

The threat of coronavirus was so serious that it gave rise to talk about the coordinated intervention of central banks. The Fed announced its readiness to act depending on the circumstances, the Bank of Japan – on its intention to stabilize markets through asset purchases, the Bank of England – on cooperation with the Treasury and international partners in order to protect financial stability, the Reserve Bank of Australia did reduce the cash rate by 25 b .P. In this regard, Christine Lagarde's statement about the ECB's readiness to take appropriate measures commensurate with the main risks seems somewhat belated.

It should be noted that central banks cannot force people to spend, but they are able to help companies whose debt service costs become difficult if demand weakens to resolve cash flow problems. The global economy is facing serious difficulties due to disruption of supply chains and a reduction in demand, which is indicated by a fall in the global index of purchasing managers in the manufacturing sector to a record bottom and a sharp decrease in GDP forecasts.

Global PMI Dynamics

Global PMI Dynamics

Source: Bloomberg.

According to the World Bank, the global economy will expand not by 2.9%, but by 2.4% in 2020, and provided that the coronavirus is defeated in the coming months. If not, then growth will decline to 1.5%. Even in the base case scenario, a pandemic will cost global GDP $ 400 billion. In 2021, economic growth should accelerate thanks to China, whose economy will expand not by 5.5% as previously assumed, but by 6.4%.

The dynamics of world GDP

The dynamics of world GDP

The dynamics of world GDP

Source: Wall Street Journal.

Change in World Bank forecasts

Change in World Bank forecasts

Change in World Bank forecasts

Source: Bloomberg.

Thus, the situation is really very serious, and the coordinated actions of central banks look reasonable. As, however, is the intention of the G20 finance ministers to organize a remote video conference and discuss fiscal stimulus issues. However, the White House prefers to talk not about tax cuts, but about the need for monetary expansion. Donald Trump from compliments returned to criticism. According to the President of the United States, the Fed is acting too slowly, and it is unclear why the central bank has not yet reduced loan costs.

Meanwhile, quotes reached the second target at 1.114, indicated in one of the previous materials. Pressure on the US dollar is likely to persist at least until March 4. On this day, an unplanned meeting of the Fed may take place with a potential surprise in the form of a rate cut.

Dmitry Demidenko for LiteForex