Market overwhelmingly expects rate cut next month
In one week, futures traders have gone from seeing virtually no chance of a rate cut at the Fed's next policy meeting to a more than three-quarters likelihood.
Why it matters: Economists aren't sure a rate cut would be effective at offsetting the damage from the coronavirus outbreak, and would put the Fed in a weaker position to bolster the economy should the U.S. fall into a recession.
- But under chair Jerome Powell, the Fed has not gone against the market once in two years of policy meetings.
Details: Markets see significant likelihood the Fed cuts rates three times this year, and sees one rate cut each by the European Central Bank and Bank of England this year.
- This is despite the Fed barely holding U.S. interest rates at a positive real level (above the rate of inflation), the ECB holding rates at -0.5%, and the BoE with rates at all-time lows.
Be smart: "With Fed rate cut probabilities for the March meeting now at 70% either Powell, [vice chair Richard Clarida or N.Y. Fed president John Williams] need to address the shift in market expectations," RSM chief economist Joe Brusuelas tells Axios in an email.
- "If this is left unattended the Fed runs the risk of a major market upset around its March 17-18 meeting."
Yes, but: “The problem with doing monetary stimulus is that it will have limited impact on the effects of the virus,” Jens Peter Sorensen, chief analyst at Danske Bank, tells Bloomberg.
- “The COVID-19 virus is keeping people from work, the supply chain is disrupted and tourists are not going to Italy. Monetary policy can do very little.”