The Fed’s money-pumping efforts are driving a new economic cycle that’s reminiscent of 2009, Canaccord Genuity says

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  • The Federal Reserve’s liquidity-boosting measures place the economy on track for a 2009-style upswing, Canaccord Genuity analysts said in a Thursday note.
  • Policymakers signaled on Wednesday that the central bank would hold rates near zero through 2023 and maintained asset purchases of at least $120 billion in Treasurys and mortgage-backed securities per month.
  • The purchases spiked excess cash in the financial system, but liquidity has since fallen from its peak.
  • The excess-liquidity trend is “just like” the post-peak reversal seen “as the economy emerged from the 2009 recession,” the analysts said.
  • The Fed’s policy “reinforces our view that we are in the early stages of a new economic and market cycle,” they added.
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The Federal Reserve’s plans for long-lasting aid are on track to drive a 2009-style economic comeback, Canaccord Genuity analysts said Thursday.

The central bank on Wednesday elected to hold interest rates near zero, but the Federal Open Market Committee’s two-day meeting also revealed how the Fed aims to guide policy for years to come. Policymakers maintained the Fed’s pace of asset purchases, pledging to keep buying at least $80 billion in Treasurys and $40 billion worth of mortgage-backed securities each month.

Since the coronavirus outbreak began, the purchases have driven a sharp increase in excess liquidity, or the difference between available money and that needed for economic growth. But excess liquidity recently fell from its peak amid a late-summer rebound in industrial production, Canaccord said.

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The excess-liquidity downtick is “just like” the post-peak drop seen “as the economy emerged from the 2009 recession,” the analysts Tony Dwyer and Michael Welch said, adding that it “reinforces our view that we are in the early stages of a new economic and market cycle.”

Canaccord’s team also highlighted upgraded outlooks from the Organization for Economic Cooperation and Development in their bullish projection. The organization on Wednesday lifted its forecast for global growth this year to -4.5% from -6%. Group of 20 nations’ collective GDP is expected to slide 4.1%, and China is set to be the only country with positive growth in 2020.

The latest OECD data reinforces the beginning of a new economic cycle as major economies swing out of their pandemic-induced slumps, Canaccord said. Investors should position for broad market gains over the next six to 12 months and “use any bouts of volatility like last week to add exposure” to recovery trends, the analysts said.

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Uncertainty about the presidential election, the coronavirus’ spread, and US-China trade tensions will continue to weigh on markets, they added. Still, the Fed’s latest meeting cemented long-term monetary support and should reassure investors that the policy backstop is intact.

“The market risks are real and can lead to temporary pullbacks like last week,” the team said. “But, the clear Fed policy is to attack any liquidity or credit issues as they emerge.”

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