From Bitcoin to fiat currencies, everything moves in a correlated order. April turned out to be one of the best months in history for the US equities, but the road ahead is full of uncertainties.
The two most important central banks in the world, the Federal Reserve and the ECB announced last week their monetary policy stance. Moreover, the market focused on what the central banks plan to do next – and it was not disappointed.
As it turned out, both the Fed and the ECB stand ready to flood the financial system with whatever amount of money needed. To be fair, they should do so.
Fed Unlikely to Fulfill Its Mandate
The Federal Reserve’s dual mandate of price stability around 2% inflation and job creation took a hit lately. The health crisis created by the coronavirus outbreak led to millions of people applying for unemployment benefits in the last six weeks.
Only in February this week, the Fed dealt with problems related to full employment – not anymore. Chair Powell’s press conference reiterated the readiness to do more and the Fed’s willingness to let inflation concerns for some other time.
Judging by historical data, the US real GDP is poised for a sharp move lower – implying the Core CPI, which lags six quarters, will move lower as well. In a way, it is no wonder considering the lower oil prices we see these days. But inflation threatening the negative territory has more implications for the Fed’s mandate than it appears at first. Is it possible for the Fed to turn to negative interest rates?
ECB Stands Ready to Do More If Needed
Last Thursday, the ECB delivered its monetary policy statement, signaling it stands ready to do everything in its powers to support the Euro area economies. While it kept the interest rates steady, it announced TLTROs (Targeted Long-Term Refinancing Operations) at -1% and a possible extension of its pandemic emergency program beyond the end of 2020.
While the move is welcomed, it looks like peanuts when compared with what the Fed does. According to the Federal Reserve Bank of St. Louis, the US stock of money, M2, has risen sharply. It comes in contrast with the inflation expectations presented earlier, but it just shows what the Fed is facing during this crisis.
Financial markets tracked the US stock market in the last two months. The sharp recovery there sent the USD lower and the EUR, AUD, or GBP higher.
Judging by the long-term perspective, the current dip in the US stock market prices is just a correction, like many other ones in the past.
Does it mean the USD will continue its slide?