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The Federal Reserve (Fed) lowered its benchmark interest rate nearly to zero on Sunday. It was the second emergency rate cut in two weeks and the latest evidence of the serious threat that policymakers believe the coronavirus poses to the economy and markets.
Investors should expect these extremely low interest rates to persist even after the economy starts to improve, says Michelle Meyer, head of U.S. Economics, BofA Global Research. “The Fed is not just cutting in the face of this shock, with a quick reversal thereafter,” believes Meyer.
Also on Sunday, the Fed announced that it will begin a new round of “quantitative easing” by purchasing $700 billion in United States Treasurys and mortgage-backed securities over the coming months. Quantitative easing was one of the primary responses the Fed used to help stimulate the economy during the financial crisis of 2008.
What do these steps mean?
The Fed’s actions are a positive step, but just the start of what’s needed to calm markets, says Mark Cabana, head of U.S. Interest Rate Strategy, BofA Global Research. “We think the proper policy response will require coordinated and forceful action from all branches of government.” At the same time, he cautions that further policy responses, while necessary, may not be able to prevent the economy and markets from weakening further as businesses shutter their doors and families self-quarantine.
What can investors consider doing?
How the markets respond moving forward “is subject to further policy responses,” notes Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “The best course for these unsettling times is to remain focused on your long-term goals and on diversification across and within asset classes. Avoid panic selling,” he says. Though extremely low interest rates reduce the income potential of bonds, they remain an important part of a portfolio, mainly as a way to mitigate risk, he notes.
As for stocks, history shows that even through difficult times markets and the economy eventually do improve, Hyzy adds. Selling investments out of fear right now could potentially lower diversification benefits and prevent investors from experiencing gains when coronavirus-related volatility ultimately subsides and economic activity begins to recover.
Information is as of 03/16/2020
Opinions are those of the authors and are subject to change.
The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for Global Wealth & Investment Management ("GWIM") clients, is part of the Investment Solutions Group (“ISG”) of GWIM, a division of Bank of America Corporation (“BofA Corp.”).
BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.
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