Analysts say Fed measures go overboard

The market rout on Wall Street following the US Federal Reserve's aggressive rate cut indicated that the pressing task for central banks is not to intensify stimulus but stabilize expectations by taking calm actions, experts said on Tuesday.

They expected China's central bank to remain prudent and focus on the domestic situation in repairing the economic damage from COVID-19, helping to anchor investor confidence.

China's key Shanghai Composite Index wobbled on Tuesday and edged down by 0.34 percent to close at 2,779.64 points, while the ChiNext Index, which tracks Shenzhen's innovative startup-heavy board, ended up by 0.36 percent at 1,917.70 points.

This contrasted with plunges of around 12 percent in the three major stock indexes in the United States on Monday, with the Dow Jones Industrial Average shedding nearly 3,000 points and setting a record for a single-day point loss.

US stocks plunged on Monday's market opening and tripped a circuit breaker that halted trading for the third time since last week and the fourth time in history. Hours before, the Fed announced its biggest rate cut on record of a full percentage point, which slashed its policy rates to a range of 0 to 0.25 percent, accompanied by $700 billion of quantitative easing.

The move spooked the market by igniting doubts on whether the move signaled the Fed's determination to stabilize growth or indicates that things are so dire that it had to make extraordinary moves, according to analysts at China International Capital Corp.

There has been a deeper fear that after the cut, the Fed has basically run out of conventional interest rate tools. That would mean that the US authorities could resort only to unconventional monetary tools and fiscal policies to cushion any future economic downturn, the research note said.

"The vicious cycle between the US stock market turbulence and the Fed's overreaction has illustrated that policymakers should stay calm and rational when facing challenges, which will help manage investor expectations and mollify panicky sentiment," said Steven Zhang, chief economist at Morgan Stanley Huaxin Securities.

Central banks should not go overboard and deplete their policy space in the face of the coronavirus shock, but instead should save their ammunition for what is likely to be a rather long cycle of global recession, Zhang said.

"One important reason behind the recent resilience of the (Chinese) A-share market, apart from the preliminary containment of the epidemic, is that the central bank did not follow the Fed in cutting interest rates but stayed firm at its own policy pace," Zhang said.

Since the beginning of this month, the Shanghai Composite Index had lost 3.49 percent as of Tuesday, while Wall Street's S&P 500, London's FTSE 100, and Japan's Nikkei 225 all lost around 20 percent.

On Monday, the People's Bank of China, the central bank, injected 650 billion yuan ($92.7 billion) into the market via a cut in some banks' required reserves and a medium-term lending facility operation. But it did not lower the interest rates of the facility, used to lend to financial institutions.

Analysts foresee multiple easing measures by the PBOC, including a cut in the one-year benchmark deposit rate, as coming out soon, but they discount the possibility of a massive stimulus package.

Zhang Yu, chief macroeconomic analyst at Hua Chuang Securities, expected the central bank to flexibly adjust its policies based on the performance of domestic demand and the effects of fiscal supports, while regarding the moves of other central banks as a less important factor to consider.

With larger room to move in macroeconomic policy than many overseas counterparts, Chinese financial markets have the basis to remain resilient, Xiao Yuanqi, chief risk officer of the China Banking and Insurance Regulatory Commission, said on Tuesday.

Scott Reeves in New York and Li Xiang in Beijing contributed to this story.