The US Fed launches Mother of all QEs

[vikkik]

The mother of all QEs is here - US Federal Reserve has announced:

a. Interest rate cut by 100bps to 0% - 0.25%
b. Emergency lending rate cut by 125 basis points to 0.25%,
c. Increased the emergency lending term of loans to 90 days.
d. Buying of $500 BN of Treasurys and $200 BN of agency-backed mortgage securities.
e. Pushed major banks to use the equity + liquid buffers ($1.3 TN + $2.9 TN) for lending and manage credit expansion.

Reactions:

a. Instantly, eight largest U.S. banks (Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, State Street, and Wells Far go) have suspended share buybacks program to support the Fed's idea of credit expansion.

b. The US Dollar should react to this monetary policy action - Fed buying will lead to fall in DXY, in turn, emerging nations currency should show signs of strength.

c. The US Treasury Bond Prices must rise and Yield should fall with this action plan. The 10YR Yield is now at 0.7% (significant fall of ~0.3%).

How will this impact India? Lets have a discussion!

 

[kenjisan70]

@vikkik Below are my preditions -
1. Gold to reach new ATH
2. RBI to cut rates by at least 100bps. (lock in FDs before rates fall further)
3. Market to remain very volatile, +3%, -7% days this week.

 

[resjudicata]

@kenjisan70

1. I think the trend upwards in general but spike only when something really bad happens, like the number of cases jumping in India. We’ve started WFH, quarantines and reduced public activity but we don’t know how well this is implemented in other areas. There might still be a spike to come.
2. Hopefully sooner than later

 

[wylted]

@kenjisan70 How is an RBI rate cut justified given the inflation rates in India?

 

[kenjisan70]

@wylted IMO to reduce borrowing rates for businesses, consumers and Govt itself. Our inflation is not too high, so this should be ok.

 

[gospelmidi]

@wylted To be honest inflation had eased slightly before the oil price war started, and with cheaper oil and less consumption in general, can only see it going down further.

 

[april78chastity]

@kenjisan70

Gold to reach new ATH

Why do you say that?

 

[ndicharles]

@april78chastity Can't buy stocks (heightened uncertainty), can't buy bonds (lower yield because of QE) people will run to buy precious metals.

 

[resjudicata]

@ndicharles Not just lower yield, outright negative yields on US gov bonds.

 

[ndicharles]

@resjudicata That’s not the reality, atleast for a couple more weeks. What’s more scary is that the Fed has allowed all banks and depository institutions to keep zero reserves and lend out all of it. This will be the single biggest factor that can trigger a major 2008 type depression due to a fall of a major bank.

US savings in trouble

https://www.federalreserve.gov/monetarypolicy/reservereq.htm

"""As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions."""

 

[porsche]

@ndicharles How would reducing reserves requirement increase the likelihood of fall of a major bank (excluding yes bank style stuff)

 

[micky123]

@porsche My understanding is, If a bank has reserves, when a major industry defaults (Eg Shale Oil / Gas) bank will be able to absorb the loss, sustain itself for some time , continue with business and hopefully become profitable with time ... If there are no reserves where/who will bear/absorb this loss?

 

[porsche]

@micky123 That’s a valid point. Banks need buffer to absorb shock loss. But they can cover the loss through retail profit and lending to profitable industries.

 

[april78chastity]

@ndicharles OK, thanks.

 

[hellofriends]

@kenjisan70 Im a noob, what is quantitative easing and why is it talked about a lot?

 

[roseyviolet]

@hellofriends A fancy word for printing more money.

 

[richardhandsonn]

@kenjisan70 RBI is doing a press conf at 4 pm today, May be for a rate cut.

 

[mr_skyfish]

@kenjisan70 What would be impact on debt funds with interest rate sensitivity?

 

[heliumskylark]

@mr_skyfish A rate cut should ideally provide a boost to debt funds NAV depending on their YTM but we are in very uncertain times and debt funds have taken a hit in the last few days due to lower demand of bonds. So I don't know what the impact will be.

 

[resjudicata]

@kenjisan70

1. kab hoga? What’s going on with silver?