Recession looms large as US feeds worries

Business | Andrew Wong 25 Mar 2019

Last week, the US Federal Reserve, as the market expected, kept interest rates unchanged.

However, to the surprise of the market, as many as nine of the 17 Federal Open Market Committee members lowered their outlook for the federal funds rate.

In a statement after the meeting, the committee said that there are no expectations of another interest rate rise this year.

However, there is a chance of a rate rise in 2020.

Meanwhile, an announcement is expected over a plan to slow down the shrinkage of the balance sheet, with the end coming in September.

The market was not pleased by the sudden dovishness of Fed officials.

Instead, they were more worried as investors suspected the central bank might have still-unpublished data that indicates a sharp downturn in the economy, which caused a shift from last year's more hawkish monetary policy.

The biggest reaction from the market was in treasuries.

The three-month and 10-year bond yield curve almost appeared upside down after the Fed statement.

The two spreads narrowed to only 5.5 basis points, below 10 basis points for the first time since September 2007, and the one-year and seven-year treasuries saw inverted yield curves.

Of course, that may not necessarily mean the United States and even the global economy are looking at a recession, especially as the Fed, in addition to its plans to suspend its balance sheet shrinkage in September, also said that when its federal agency debts and government-issued mortgage-backed securities expire, it will withdraw the principal again and throw it back into the US treasury bonds.

And the market generally believes that the Fed will buy shorter debt, which seems to stimulate short-term treasury prices to rise sharply, becoming one of the reasons that the yield curve has inverted.

However, the influence of Fed's bond-buying operation does not mean the investment market has no economic worries.

Fed chairman Jerome Powell said the biggest economic worry now is from the impact of China and European's great economic easing.

Of course, with a loose monetary policy, growth in China and Europe have the opportunity to rebound in the next two seasons, but all will depend on the trade agreement between China and the United States.

Therefore, the rapid shift of the Fed's policy is the result of the President Donald Trump's unpredictable policies and behavior, which have had an economic impact.

At the same time the coupon has an upside-down reason for the crisis, which is just an indication of a recession that is actually an expression of the anxiety investors have toward the US and its constant change in relations with other countries.

is chairman and CEO of Anli Securities

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