Mar 2, 2020 - Economy

Goldman Sachs expects a full percentage point of rate cuts from the Fed

Fed Chairman Jerome Powell

Fed Chairman Jerome Powell. Photo: Sarah Silbiger/Getty Images

Fed chair Jerome Powell's statement on Friday afternoon that the U.S. central bank was "closely monitoring developments" and would "act as appropriate to support the economy" has eliminated any doubt that the Fed will cut U.S. interest rates at its meeting on March 17–18.

What we're hearing: "A Fed cut in March appears nearly certain," analysts at Goldman Sachs said in a late Sunday note to clients.

  • Goldman is now expecting a 50-basis-point cut this month, followed by two more rate cuts "in April and June, for a total of 100bp."

Where it stands: U.S. interest rates are currently set at 1.50%–1.75%, and cuts at that level would take them to 0.5%, giving the U.S. negative "real" rates — well below the level of inflation, according to the personal consumption expenditures measure the Fed favors.

  • Fed funds futures prices show the market expects the Fed to cut 100 basis points by July, with rates falling to 0.25% by December.

What's happening: Speculation that the rate cuts are on the way helped pare losses in U.S. stock market futures prices, as did comments from Bank of Japan governor Haruhiko Kuroda who said the central bank would provide “ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”

  • The BOJ followed up the statement by offering to buy $4.6 billion of government bonds with a repurchase agreement.

The big picture: Guggenheim Partners global CIO Scott Minerd, a member of the New York Fed's investor advisory committee, said last week that he had been contacted by officials and was expecting a statement regarding "some sort of monetary coordination."

  • That would likely mean the world's central banks are planning interest rate cuts or additional stimulus.

Worth noting: The Fed cut rates three times in 2019 and has added nearly $400 billion to its balance sheet through a new bond-buying program it began after the repo market spike in September.

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