*By Christophe Barraud, Chief Economist & Strategist at Market Securities
It has been another busy week for policymakers in developed countries. Central banks didn’t hesitate to reaffirm their support to the economy in a context where prospects remain particularly uncertain.
On Monday, the U.S. Federal Reserve said it will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers. In the meantime, the Federal Reserve Bank of Boston also announced that the Fed’s Main Street Lending Program opened for lender registration. As a reminder, Bloomberg highlighted that “the Fed lowered interest rates to near zero in mid-March and has purchased trillions in bonds to support credit markets. It has already unveiled nine emergency lending programs to help both households, companies, states and local governments.”
On Tuesday, the Bank of Japan followed the Fed by revising upward the estimated size of its virus-response measures to 110 trillion yen (up from 75 trillion yen) while pledging to do more to help the pandemic-hit economy if needed.
Later, Federal Reserve Chairman Jerome Powell testified via video conference before the Senate Banking Committee and offered another prudent assessment of economic news, noting that the U.S. economy has a long way to go before returning to pre-crisis level.
Overnight, Vice Chairman Richard Clarida noted the COVID-19 contagion shock is disinflationary. He added that the likely depth of the downturn may threaten the stability of long-term inflation expectations, which could be seen as another greenlight for the Fed to remain accommodative in the short term.
The focus will now shift to the Bank of England monetary policy meeting on Thursday. The MPC is widely expected to increase its quantitative-easing program (by at least £100 billion according to the consensus).
All in all, given that risks to the inflation outlook appear clearly skewed to the downside in developed countries and especially the U.S. (2nd wave, trade war, presidential election, social unrests, financial risks such as CLOs, CMBS, etc.), central banks will remain very accommodative in 2020.
In this context, Trackinsight data showed that the latest announcements helped LQD, the best-known ETF holding U.S. investment-grade bonds, to retest a record high, with inflows significantly increasing in 2020.
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