Feb 28, 2020 - Economy

Market overwhelmingly expects rate cut next month

Data: CME Group; Chart: Naema Ahmed/Axios
Data: CME Group; Chart: Naema Ahmed/Axios

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.”

Go deeper: Federal Reserve leaves interest rates on hold

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