Did the Fed Provide an Early Spring?

03.03.2020 - Jeffrey S. MacDonald, CFA

What happened this morning?

Earlier today, the Federal Open Markets Committee (FOMC) announced an unscheduled cut to the fed funds rate of 50 basis points. Off-cycle moves like this are relatively rare and usually require abrupt shifts in growth expectations to justify their implementation. Today’s action was the first intermeeting, emergency rate cut since 2008 and also the biggest one-time cut since then. The new benchmark interest rate target is 1.25%.

What changed for the FOMC?

In his public comments this morning, Chair Jerome Powell stated that the easing action was undertaken to help support the US economy after new risks to the outlook have evolved with the spread of coronavirus. While he expressed confidence in the domestic economy which is supported by both low unemployment and rising wages, risks to the outlook have changed materially with the ultimate impact of the outbreak highly uncertain. Powell added that the acceleration outside of China and the identification of new infections in the US represented a significant increase of the risks to the economic outlook. The FOMC also believes that global growth and solid labor markets will return when the virus is ultimately contained.

What about other potential central bank actions?

It is worth pointing out that Powell made no commitment regarding any imminent policy moves by other central banks in the wake of the FOMC’s decision. Also, he suggested that the FOMC believes the current stance of monetary policy is appropriate after this move, with no commitment to additional cuts at upcoming meetings.

What is the market impact of the rate cut?

Investors recognize that monetary policy will not be able to directly reduce the spread of the virus or repair damaged supply chains. Today’s action, however, should boost household and business confidence in an effort to keep the US economy strong.

Key Takeaways

  • In our opinion, the market is still expecting additional cuts at subsequent FOMC meetings including a 25-basis point decrease during the scheduled March 17-18 meeting.
  • We would expect responses (i.e., additional easing measures and forward guidance) from other central banks on the heels of today’s FOMC move and the earlier release of the G7 memo confirming global central bank commitment to the use of monetary policy tools in response to the outbreak.
  • Following the decision, the US Treasury market has rallied led by the front end of the yield curve based on the expectation of more rate cuts.
  • Stocks rallied upon the initial FOMC announcement but have since traded off in the wake of this morning’s press conference by Chair Powell as investors were disappointed by the lack of commitment to future global central bank coordination, rate cuts and the use of other policy tools to offset the economic impact of the spread the coronavirus.

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