The S&P/ASX 200 Index (ASX: XJO) is continuing to spiral downwards today, notching up a 7.16% loss at the time of writing and wiping out all of Friday's surprise gains.
In a time like this, you would expect the Reserve Bank of Australia (RBA) to intervene and they have – slashing interest rates to a new record low of 0.5% two weeks ago. But with the US Federal Reserve announcing another emergency cut of 0.5% overnight, it seems more firepower might be needed for the ASX and the broader Australian economy to try and stave off a recession.
The only problem is that interest rates are already at record lows. Unlike the GFC a decade ago, the RBA has precious little dry powder left to act decisively today.
So it should come as no surprise then that the RBA is considering a quantitative easing (QE) program for the Australian economy to match that of the USA.
What is quantitative easing?
Its detractors call it 'money printing' but that's not the description the RBA prefers. Quantitative easing is basically the last remaining option in the RBA's arsenal when interest rates get to zero to stave off a recession.
It can involve a range of strategies, including the RBA purchasing assets in the bond market (or even the share market in extreme circumstances), devaluing currencies or injecting liquidity into financial markets through other means.
And according to reporting in the Australian Financial Review (AFR), it's the bond market that the RBA will target first. The AFR quotes Deputy RBA Governor Guy Debelle, who stated that quantitative easing is "absolutely" under consideration as a response to the economic ructions stemming from the coronavirus.
"There are scenarios in which we are certainly going to have to consider that – absolutely," Dr Debelle stated, referring to the RBA buying government bonds to lower borrowing costs across the economy and placing downward pressure on the Australian dollar.
"We're basically acting in the government bond market as necessary to keep the risk-free rates low," he added.
What would this mean for ASX shares?
The great Warren Buffett likes to say that interest rates act like gravity on stock prices. So if these rates are zero and the RBA continues to lower the risk-free rate through QE programs like bond-buying, it's likely to have a positive effect on share prices over the medium to long-term.
Of course, in the short term, markets are justifiably more worried about the economic impacts of the coronavirus, and so we are likely to see extreme volatility as these two forces clash. It's going to be a bumpy ride folks!
