The FOMC Will Cut Rates, But Not This Month

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Fed to cut rates again in March, but effectiveness challenged: Reuters poll

(Reuters) – The Federal Reserve will cut U.S. interest rates by 25 basis points later this month but it is a close call, according to a Reuters poll of economists who have substantially raised their forecasts for the chances of a recession following the coronavirus outbreak.

Those conclusions come after the Fed chopped interest rates by 50 basis points on Tuesday – its first such emergency move since the financial crisis – to offset economic risks from the virus which have rocked financial markets for weeks.

But a large majority of respondents – just over 85% – challenged the move, saying that cutting interest rates was not the most effective policy to fight disruptions from the spreading coronavirus epidemic.

The Fed’s rate cut failed to calm global financial markets, with safe-haven Treasury yields hitting lifetime lows repeatedly. The S&P 500 index of Wall Street shares dropped over 10% from its Feb. 19 closing high, after logging its biggest weekly percentage decline since October 2008.

“A rate cut by the Fed, especially now, so early in the coronavirus episode, is terribly ill-considered. If we get a bunch of new cases or deaths. does the Fed easing have persistent benefits to the stock market – because it certainly is going to do next to nothing to directly boost the economy,” noted Stephen Stanley, chief economist at Amherst Pierpoint.

“They just fired off their bazooka, and if it does no good, then what? The argument that the Fed should be early and aggressive and get ahead of events is persuasive, but in this case, when there is little to nothing the Fed can do to prevent the more adverse scenarios, I just don’t buy it.”

In the poll taken March 4-6, 44 of 75 economists forecast at least a 25 basis point cut at the March 17-18 policy meeting, including nine who predicted a half a percentage point cut at the meeting. The remaining 31 expected no change.

Median forecasts from the poll predicted one more cut by the end of the second quarter, taking the federal funds rate to 0.50-0.75%.

“The bar for Fed officials to tell market participants that they are wrong to look for another near-term cut is high given the fragility of markets. So while the March meeting is a close call, we think the Fed will deliver another 25 basis points of easing,” said Michelle Meyer, U.S. economist at BofA global research.

When asked if the Fed should ease further in March, respondents were evenly split, suggesting a lack of confidence that monetary policy is the right tool to use to fight a near-term economic slowdown driven by the virus.

The interest rate futures market is pricing in a 100% chance of a cut in March. Futures pricing reflected a roughly 63-37% chance of a quarter percentage point cut versus a half point reduction.

“Uncertainty is high across several dimensions – the Fed’s reaction function, the number of U.S. cases to be reported in coming weeks, the extent of the weakness in upcoming U.S. and global data, and financial conditions,” wrote Jan Hatzius, chief economist at Goldman Sachs in a report to clients.

“But all things considered, our baseline expectations are an additional 25 basis point cut at the March 17-18 meeting followed by a 25 basis point cut in April.”

The coronavirus has induced supply-chain disruptions, travel bans, a shutdown of factories and in China, lockdowns of cities.

There was a clear jump in the median probability of a U.S. recession over the next two years.

The risk of a recession rose to 30% in the next year from 23% predicted last month and to 40% in the next two years from 30% penciled in previously.

Three economists went so far as to predict the fed funds rate would fall to zero by the middle of this year and three said it would reach that level by the end of next year.

Other central banks, including the Bank of Canada, the Reserve Bank of Australia and the Malaysian central bank, have eased this week, with others expected to follow soon, including the Bank of Japan. [ECILT/JP]

China’s economic hit was now expected to be more severe in the current quarter than thought three weeks ago, triggering expectations for rate cuts to be front-loaded.

Graphics by Mumal Rathore, Polling by Sarmista Sen; Editing by Chizu Nomiyama

The Fed

Greg Robb

Easing expected at March 17-18 meeting

Federal Reserve Chair Jerome Powell said this week that interest-rate action will provide a ‘meaningful boost’ to the U.S. economy.

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The Federal Reserve is not done cutting interest rates. That’s the view from Wall Street.

Economists for leading financial firms expect the U.S. central bank to follow up this week’s emergency half-point interest-rate cut with another move at its March 17-18 meeting.

The reasoning is not that the Fed is trying to hold the stock market’s hand. Instead, Fed officials want to cushion the blow to the economy expected from the coronavirus outbreak, economists said.

There is no reason for the central bank to not keep cutting rates, said Avery Shenfeld, chief economist of CIBC Capital Markets.

“It’s no harm, no foul,” he said.

CIBC expects a quarter-point cut on March 18 and another at the Fed’s next formal meeting in late April.

If the economy somehow manages to avoid weakening substantially, the central bank can always take the rate cuts back, Shenfeld noted.

Economists aren’t confident the U.S. can get by unscathed.

Peter Hooper, global head of economic research at Deutsche Bank Research, said his firm expects the U.S. economy “to slow pretty close to zero” in the first half of this year. Deutsche Bank is forecasting a more-aggressive half-point rate cut on March 18.

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Economists note that every step taken to prevent the spread of the coronavirus will show up in the economic numbers. As people pull back from going out to eat and to movies, growth will slow. Airline stocks JETS, -3.35% , for instance, have fallen sharply.

Lewis Alexander, chief U.S. economist at Nomura, said the Fed’s thinking is pretty clear.

“They’re going to respond to what’s in front of them,” rather than try to guess how it plays out, he said.

And what they see is growing likelihood of a negative shock, Alexander said.

Nomura expects a quarter-point rate cut on March 18 followed by another in April.

U.S. equity benchmarks continued to move in volatile fashion over the past two weeks. The S&P 500 SPX, +2.28% has given up all its gains seen since October. On Thursday, the Dow Jones Industrial Average DJIA, +2.24% closed down 969 points to 26,121.

The yield on the 10-year Treasury note TMUBMUSD10Y, 0.604% has fallen for 10 straight trading days with the yield at 0.918%.

There will be a slew of Fed speakers over the next day and a half before the central bank goes into the normal quiet period ahead of its March meeting.

New York Fed President John Williams, a member of Powell’s inner-circle, will speak this evening in New York.

And on Friday, six regional Fed presidents will deliver remarks at a conference on Fed monetary policy in honor of Marvin Goodfriend, a former Richmond Fed top economist, who passed away last December.

Bond Investors Seem Sure the Fed Will Cut Rates, but Not About When

By Stephen Grocer

    June 19, 2020

Get the DealBook newsletter to make sense of major business and policy headlines — and the power-brokers who shape them.

The Federal Reserve is deliberating over its plans for interest rates in the year ahead. Bond investors appear to have already made up their minds about what will happen.

Yields on almost every security offered by the Treasury Department — including debt that’s due in one month or 10 years — have fallen below the Fed’s target range for its benchmark interest rate, known as the federal funds rate.

That means investors expect the Fed to push interest rates lower and keep them there. Only the longest-maturity security the United States government sells, the 30-year bond, is trading above the Fed’s target rate range of 2.25 percent to 2.5 percent. But it is not far off. By late Tuesday, the 30-year bond was yielding 2.55 percent.

The shift lower accelerated in May with the escalation of trade tension between the United States and China, and it is another indication that investors believe the Fed made a mistake when it raised interest rates four times last year.

That the yields on almost all the securities sold by the government have fallen below the Fed’s target rate also serves as another warning signal about the economy. Only twice in the past 20 years have the yields on every Treasury dropped below the federal funds rate for a period. In both instances, the move lower preceded an economic downturn — first with the bursting of the dot-com bubble in 2001, and later as the 2008 financial crisis approached.

[Read more about what the bond market is saying about the economy.]

Interest rates on government bonds have broadly moved lower this year. The yield on the two-year and five-year bonds dropped below the Fed’s short-term benchmark at the end of January. Nearly two months later, the 10-year bond slid below Fed’s target rate of 2.5 percent.

But the declines in the rates on each bond offered by the Treasury were not equal. The yield on the shortest-term bills (like the three-month bill) fell the least, while the steepest decline came in the two-year note. Last month, it plunged nearly a half a percentage point to 1.86 percent, which kept its yield below that of the 10-year note.

That suggests investors are anticipating that the central bank will lower rates once in the next month and will become more aggressive in cutting rates after that.

How good are bond investors be at predicting the Fed’s next move? The answer could become a bit clearer when the central bank finishes its June policy meeting Wednesday.

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