The Federal Reserve swept into action on Sunday to save the U.S. economy from the fallout of the coronavirus, slashing its benchmark interest rate by a full percentage point to near zero and promising to boost its bond holdings by at least US$700 billion.
In remarks underlining the sense of urgency, Fed Chairman Jerome Powell told a hastily assembled press briefing by telephone that the disruption to lives and businesses meant second quarter U.S. growth would probably be weak and it was hard to know how long the effects would last. That left a clear role for fiscal policy to help cushion the blow.
“The thing that fiscal policy, and really only fiscal policy can do, is reach out directly to affected industries, affected workers, and we’ve seen some of that so that’s an important job,” he said. “We do know that the virus will run its course and that the U.S. economy will resume a normal level of activity. In the meantime, the Fed will continue to use our tools to support the flow of credit.”
The Fed pulled out some of the biggest weapons in its arsenal. It’s key rate is now zero to 0.25 per cent, matching the record low level it hit during the 2008 financial crisis and where it was held until December 2015.
The central bank also announced several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero percent. In addition, it united with five other central banks to ensure dollars are available around the world via swap lines. Powell said that he did not think negative rates, which have been used in Europe and Japan, would be appropriate policy in the U.S.
President Donald Trump, who as recently as Saturday attacked the Fed for not lowering rates faster and further, quickly expressed support for the move.
Trump ‘Very Happy’
“It makes me very happy and I want to congratulate the Federal Reserve,” he said. “That’s a big step and I’m very happy they did it.”
Treasuries surged and U.S. equity futures tumbled at the start of another volatile week as investors responded to the rapidly escalating economic impact from the coronavirus and bet it will overwhelm the policy response. The Bank of Japan said it was bringing forward to Monday a meeting scheduled for later this week.
The Fed’s emergency action came as more and more evidence emerged that the U.S. economy is being hit hard by the virus. On Sunday alone, Ohio ordered all bars and restaurants closed indefinitely, Nike shuttered all its stores at least through March 27 and airlines announced drastic cuts to their international flight schedules. Businesses are instructing staff to work from home, and travel and entertainment are being particularly affected as people take steps to observe social distancing to avoid infection.
As the fallout spreads across the economy, the risk of a recession is mounting. Goldman Sachs slashed its GDP forecasts on Sunday. It’s now predicting zero growth in the first quarter and a five per cent contraction in the second.
Powell, who said he planned to do some telecommuting himself to set a good work-from-home example, told reporters on the call that the rate decision Sunday is in lieu of the Fed’s regularly scheduled meeting this week, planned for Tuesday and Wednesday.
No Dot Plot
He also said that the quarterly forecasts that would have been released at that meeting had been scrapped in light of the current uncertainty caused by the virus and would probably next be updated in June.
With Sunday’s announcement, the Fed is firing some of the biggest guns in its arsenal, but economists say without a similar, forceful response from the government, the country’s record 11 year expansion could end in recession. Stocks have already tumbled into a bear market.
“The Fed had to make this move, and waiting would have been a grave mistake,” said Michael Darda, market strategist at MKM Partners. “The problem is there is a tsunami coming and the Fed is likely to be overwhelmed by it, and the markets know that.”
The Fed said it will keep interest rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
The central bank acted the day before leaders from the Group of Seven nations, including Trump, are set to discuss their virus response on a teleconference. Central bankers and investors have pressed governments to do more to support their economies given monetary ammunition is running low and because fiscal policy can be targeted at corners of an economy that need it most.
“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” it said.
To support smooth functioning in the Treasury and mortgage backed securities market, the Fed said it would lift its holdings of Treasury securities by at least US$500 billion and of MBS by at least US$200 billion.
Cleveland Fed President Loretta Mester cast a lone dissent, preferring rates were instead cut to a 0.5 per cent-0.75 per cent range.
What Bloomberg Economists Say
“The fact that the Fed saw it as necessary to act with the meeting just three days away speaks to the urgency of the matter. The broad-spectrum of tools engaged shows the Fed is contending with more than just an economic shock.”
The Fed’s actions followed the Trump administration and Congress’s first comprehensive steps Friday to assure the public that it has a coordinated public health and fiscal policy response.
The dramatic Sunday evening move was not the Fed’s first big attempt to provide support. On Thursday it sought to ease strains in the Treasury debt market through massive injections of liquidity and broader purchases of U.S. securities — a measure reminiscent of the quantitative easing it used during the financial crisis.
The Fed’s action also comes less than two weeks after it slashed rates by a half percentage point in an emergency move that failed to reassure nervous investors, in part because it was not accompanied by steps from other policy makers. That move — alone — failed to comfort investors and stocks ended the day down almost three per cent.
“The Fed’s mantra has been to go early and aggressive, so this is the best thing they could have done, they’re really inventing new stuff,” said Diane Swonk, chief economist at Grant Thornton in Chicago.
She also emphasized that more action is needed from fiscal authorities.
“This is not enough,” she said. “The Fed is showing its commitment a lot more than the federal government is. They’re going to have to step it up a lot more.”
–With assistance from Justin Sink, Ros Krasny, Tom Schoenberg, Christopher Condon, Steve Matthews, Matthew Boesler, Rachel Evans, Vince Golle and Zoe Schneeweiss.
Mortgage rates are rising in Canada despite virus-relief cuts – BNNBloomberg.ca
Canada’s mortgage rates are creeping up — even though the country’s central bank has slashed borrowing costs to combat the COVID-19 pandemic.
That’s due to the “enormous pressure” Canadian banks face amid disruptions caused by the outbreak, said Sherry Cooper, chief economist at Dominion Lending Centers.
“The costs of funds for banks is skyrocketing and bank earnings are plunging,” Cooper said Monday in a phone interview. “Every single business they have ever loaned to is subject to a massive decline in revenues, and therefore their own revenues are going down because nobody is taking out new business with banks except to extend debt.”
The Bank of Canada has cut its overnight interest rate three times this month, bringing the benchmark to 0.25 per cent. The large Canadian banks matched those moves by cutting their prime rates, which influence borrowing rates for variable mortgages and credit lines, to 2.45 per cent from 3.95 per cent at the start of the month.
As those rates have dropped, banks have been eliminating discounts off prime on variable mortgages. At the start of the month, qualified borrowers could get a rate of prime minus 1 per cent from HSBC Canada, for example, while Canada’s large domestic lenders were also offering “prime minus” deals as well.
But those discounts have shrunk by 75 to 85 basis points, said Rob McLister, founder of mortgage comparison website RateSpy.com.
Typical five-year fixed rates at also rising. Rates at large Canadian bank are now at 2.99 per cent to 3.04 per cent versus around 2.49 per cent to 2.59 per cent at the end of February, McLister said.
“The big banks are leading the charge higher here, on both the fixed side and the variable side,” he said. Preferred borrowers can still get some prime minus deals at big banks, but they’re more like prime minus 10 or 15 basis points.
McLister said the rising cost of short-term funding, used for variable mortgages, explains the jump. Spreads are wide, fewer people want to lend big banks money at preferable pricing, so that gets passed through to the borrower, McLister said.
Fixed-rate mortgages, which are tied more to swings in the bond market, are also creeping up after Canadian bond yields hit record lows earlier in the month, added Cooper.
“The banks just can’t afford to price their loans at what are de minimis bond yield levels,” Cooper said.
She expects banks to start charging prime plus a premium for variable loans, as well as higher rates for fixed mortgages than those seen earlier in the year.
“I believe mortgage rates will trend around current levels,” Cooper said. “I don’t think interest rates in general are going to be a lot higher in the next year.”
Air Canada to reduce workforce by 16,500 as it parks planes during COVID-19 – Financial Post
Air Canada will send home 15,200 unionized employees and 1,300 managers due to the “unpredictable extent and duration” of the COVID-19 pandemic.
Canada’s largest airline announced Monday it will place the unionized members on off-duty status and furlough the managers as it reduces capacity by about 85 to 90 per cent from April through June. It intends for the cuts, which will come into effect on or about April 3, to be temporary.
“To furlough such a large proportion of our employees is an extremely painful decision but one we are required to take given our dramatically smaller operations for the next while,” Air Canada chief executive Calin Rovinescu said in a statement.
“I understand and regret the impact this will have upon our employees and their families.”
Rovinescu and chief financial officer Michael Rousseau will forgo 100 per cent of their salaries, while other senior executives will take a 25 to 50 per cent pay cut. Board members agreed to a 25 per cent pay cut. Other managers’ salaries will be reduced by 10 per cent.
On Monday, Prime Minister Justin Trudeau announced the government will subsidize 75 per cent of wages for companies that lose 30 per cent of their revenue during the shutdown. It’s not yet clear how Air Canada could benefit from this, but the airline said it will assess how the subsidy could affect its workforce reduction plans.
Trudeau also acknowledged the airline industry has been “extremely hard hit” by the pandemic and said the government will do more to help the industry, but did not reveal any details.
The prime minister and senior government officials have been working with Canada’s major passenger airlines as they seek help during the crisis. Ottawa has already agreed to provide Toronto-based Porter Airlines with $135 million in commercial financing, but has yet to reveal a comprehensive package for other airlines including Air Canada, WestJet Airlines Ltd., Transat A.T. and Sunwing.
To help deal with plummeting revenue, Air Canada is also looking to cut $500 million in costs and capital spending. It will draw down about $1 billion in operating lines of credit for additional liquidity and suspended its share buyback program on March 2.
Air Canada is working with Ottawa to repatriate Canadians abroad. It will continue to operate a select number of flights after April 1, pending further government restrictions, as well as operating cargo-only flights to ensure movement of goods, such as medical supplies.
Air Canada employed about 33,000 people at the end of 2019, according to financial statements.
Air Canada employs about 4,400 pilots. It’s not clear how many pilots will be affected by the decision, but last week the Air Canada Pilots Association reached a deal with the airline to reduce pilot pay, allow pilots to retire earlier and plan for a maximum of 600 redundancies in the coming months.
Pilots placed on furlough will continue to accrue seniority and service and will be recalled in order of seniority, the ACPA said in a statement.
The International Air Transport Association predicts airlines around the world will lose US$252 billion in revenue due to the COVID-19 pandemic.
Coronavirus: Air Canada to lay off 16,500 workers amid COVID-19 pandemic – Global News
Effective this Friday, the layoffs of 15,200 unionized workers and 1,300 managers will last through April and May amid drastically reduced flight capacity from the Montreal-based airline.
“To furlough such a large proportion of our employees is an extremely painful decision but one we are required to take given our dramatically smaller operations for the next while,” chief executive Calin Rovinescu said in a statement.
The carrier has halted most of its international and U.S. routes in response to the global shutdown.
States from Sweden to China to the United States have rolled out aid packages for the airline sector over the past month as borders closed and travel demand plummeted amid the spread of the novel coronavirus.
Air Canada said its cost reduction scheme aims to save least $500 million. It includes a pledge from both the CEO and chief financial officer Mike Rousseau to forego 100 per cent of their salaries, while the rest of the executive team will give up between 25 per cent and 50 per cent.
The company will draw down about $1 billion in lines of credit to provide additional liquidity for a carrier that has a $7.3 billion cash cushion to fall back on — more than the most profitable U.S. carrier, Delta Air Lines.
Leon’s Furniture to lay off nearly 50% of workforce
Earlier this month Air Canada’s flight attendant union said 5,149 cabin crew would be temporarily laid off due to the COVID-19 outbreak. The newly announced layoffs do not include the earlier job reductions.
The pandemic has cost thousands of jobs in the airline sector. Transat AT Inc. has laid off at least 3,600 flight attendants while WestJet has seen 6,900 departures including early retirements, resignations and both voluntary and involuntary leaves.
WestJet said Monday it is cancelling all transatlantic and U.S. routes until May 4, extending its 30-day suspension by two more weeks.
Both Air Transat and Porter Airlines have halted all flights.
© 2020 The Canadian Press
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