The Federal Reserve’s extraordinary rate cut Tuesday is likely only the first of multiple efforts to stem fear over the threat the coronavirus poses to global growth and financial markets.
No sooner had the U.S. central bank announced a half percentage point reduction than market participants began speculating about what was next. Wall Street broadly expects the Fed to follow up with another cut in a few weeks followed by more monetary easing in April.
In fact, if reaction from Tuesday’s move is any indication, it will take a lot more for the Fed to assuage heightened worries over a virus-induced threat to the longest expansion in U.S. history.
“The question from here is what further adjustments do they make,” said Bill English, former head of monetary policy for the Fed and now a professor of finance at the Yale School of Management. “The answer to that is when their outlook for the economy changes, it may be appropriate to do something more. That’s going to be a hard thing to communicate over the next few months.”
Markets, indeed, will be demanding more action even if the coronavirus damage doesn’t show up in the data.
A Powell letdown
Fed Chairman Jerome Powell sought to quell some anxiety Tuesday when, during a news conference after the cut, he said he and the Federal Open Market Committee are “prepared to use our tools and act appropriately, depending on the flow of events.”
The market didn’t like it, though, and sold off sharply during and after his comments.
One source of disappointment may have come when Powell indicated that he doesn’t foresee the Fed expanding its balance sheet through asset purchases — quantitative easing — in response to current conditions.
“What they should have done is said we’re going to do whatever it takes,” said George Selgin, director of the Cato Institute’s Center for Monetary and Financial Alternatives. “It’s the path forward that’s more important than the step taken immediately.”
Cuts in March and April
Indeed, with Tuesday’s announced cut the Fed now only has another percentage point, or 100 basis points, left to go. And Wall Street expects the central bank not to waste time in using up that remaining space.
Both Citigroup and Bank of America Global Research expect the Fed to do at least 25 basis points more at the March meeting. BofA sees another similar reduction in April; Citi sees either 50 basis points in March or 25 basis points in each month.
“Further cuts may be more controversial as some on the committee will want to wait-and-see how the 50bp (and 75bp from last year) work their way through the economy,” Citigroup economist Andrew Hollenhorst said in a note. “But either soft data or tighter financial conditions will likely convince most to cut further.”
Reference: CNBC
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