Monetary Policy Takes New Action

April 13, 2020

Monetary Policy Takes New Action Photo

Last week saw two key developments by global policymakers to manage the economic fallout from the global pandemic. With deflation becoming a growing problem, as evidenced by last month’s -0.4% consumer price index, a historic deal to reduce global oil production has been reached. Global production will be cut by 10%, as demand for oil has plunged due to the slowdown in economic activity. Although the size of this cutback is historic, it’s unfortunately still not enough to equal the reduction in daily demand. Over the next several months, it will be interesting to see if demand improves before the amount of crude that has been pumped exceeds current storage levels.

The second major policy action was the announcement by the Federal Reserve (Fed) to utilize new policy tools to bolster the markets by supporting municipalities, mid-sized businesses, high yield bonds and structured credit. These programs total $2.3 trillion, bringing the Fed’s total support to $10 trillion. The Fed is not wasting any time in implementing these programs and its balance sheet has grown rapidly in the last month. By this time next year, I expect that balance sheet to exceed $15 trillion.

Risk markets continue to improve as a result of the dramatic liquidity and backstop buying by central banks. This strategy is effective in the short term, but a plan to build back economic activity needs to be put in place in the coming weeks. If no solid plan exists, markets will likely revert to the fundamentals, which I expect to be very poor as earning and economic data will likely be worse than expected.

We hope that you and those close to you are staying healthy and safe.

Tags: Federal Reserve | Coronavirus | Oil production | Liquidity | economic stimulus | high yield bonds

< Go to Monday Morning O'Malley

This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client.  Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.

Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice.  The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete.  Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements.  Actual results may differ significantly.  Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.

Investing involves risk, including possible loss of principal.  Past performance is no guarantee of future results.  All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.

High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.

All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.

Subscribe to Our Publications