Feb 4, 2020 - Economy & Business

The market is expecting multiple rate cuts in 2020

Dion Rabouin, author of Markets
Expand chart
Data: CME Group; Note: Chart does not include expectations below 5% for a rate hike in 2020; Chart: Andrew Witherspoon/Axios

Just four days into February, traders have thrown out the Fed's guidance that it will remain on the sidelines in 2020, and lined up bets for multiple U.S. interest-rate cuts.

What's happening: Fed fund futures prices show that as the coronavirus outbreak has worsened, expectations are rising that the Fed will take action, as policymakers did last year when the U.S.-China trade war began to ravage the manufacturing, trade and transportation industries.

Plus, the latest reports on the U.S. economy have not been particularly bullish, notes Jon Hill, an interest rate strategist at BMO Capital Markets.

  • He points to weaker-than-expected readings in December and January on consumer and producer inflation, jobs, manufacturing and a mixed Q4 GDP report.
  • The data "is not screaming ‘everything is awesome,'" Hill tells Axios.

Why it matters: The IMF credits loose monetary policy with stabilizing the global economy last year as central banks around the globe cut rates almost in unison. But it may not work again.

  • The European Central Bank, the Bank of Japan and a swath of central banks throughout Europe already hold negative interest rates and are pumping out tens of billions of dollars in stimulus each month.
  • The Fed has U.S. rates almost even with inflation and has added around $400 billion to its balance sheet since September.

What they're saying: Central bank stimulus may now be reaching a point where it's “ineffective if not counterproductive” in combating current issues, Mohamed El-Erian, chief economic adviser for Allianz, said during an interview on CNBC.

The big picture: Oxford Economics chief U.S. economist Gregory Daco came into the year with an out-of-consensus expectation that the Fed would cut rates once before year-end. He's now predicting "a couple of rate cuts and potentially earlier easing than even we expected" because of possible economic damage from the coronavirus.

  • "From a U.S. perspective, we anticipate a loss of 0.4% of GDP growth" in the first quarter, Daco tells Axios.
  • "This will be the result of reduced tourism activity, supply chain disruptions preventing the nascent rebound in business investment from solidifying, and tightening financial conditions constraining business and consumer outlays."

Watch this space: In addition to pricing in expectations for two rate cuts by year-end, CME Group's FedWatch tool shows traders see a greater than 50% chance of a cut by June.

  • Fed fund futures prices show a 36% chance of a rate cut as soon as the Fed's next meeting in March, according to FactSet data.

Go deeper: The Fed plans to keep pumping cash

Editor's note: A quote in the story was clarified to show Gregory Daco was referring to the loss of U.S. GDP growth in the first quarter.

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