(ATF) Investors are on the back foot after the US Federal Reserve painted a gloomy economic picture at the rate setting meeting overnight but the tone remains optimistic on the assurance of low interest rates for longer.
In its post-meeting statement, the US central bank said the coronavirus pandemic “will weigh heavily on economic activity, employment, and inflation in the near-term, and poses considerable risks to the economic outlook over the medium term.”
The Fed projected the US GDP would shrink by 6.5% in 2020 before recovering to 5% in 2021. It lowered its projection for 2020 from what it forecast last December while upgrading its projection for 2021.
But the Fed also indicated there was a need to maintain zero interest rates through at least 2022.
“Markets should like today’s decision, reassuring them that stimulus is still at play and giving a 'nod' to a continued equity market rally,” Seema Shah, chief strategist at Principal Global Investors, said following the FOMC decision.
“The key message of lower for longer, reiterated by the dot plot, suggests interest rates are locked near the zero bound through the forecast period to 2022.”
Asian markets lower
In Asia, Japan’s Nikkei index is down 1%, Australia’s S&P/ASX benchmark is 2.4% lower and Hong Kong’s Hang Seng index is 0.72% lower.
Investors are now awaiting further support from regulators in the world’s largest economy after Fed Chairman Jerome Powell said at the press conference the pandemic “weighs heavily” on the American economy and that the US central bank would do “whatever we can, and for as long as it takes” to support the recovery and “limit lasting damage” to the economy.
“Against this backdrop, further stimulus can be expected from the Fed – and also perhaps from Congress too – in the near future as the economic revival will be a longer process than many had hoped,” financial advisory firm deVere Group’s CEO Nigel Green said.
“This ‘backstop’ from the Fed slashes the threat of a second market slump even if economic data comes in worse than next quarter. It provides something of a ‘floor’ for equities.”
Credit markets were also defensive with the Asia IG index wider by one basis point at 86/87. Sovereign CDS was 2-5 basis points wider.
But primary markets are busy following the US Federal Reserve’s message of low interest rates for longer.