Fed Chair Jerome Powell signaled that the Federal Reserve stands ready to take action to support the economy in the face of heightened risk and fear of the global coronavirus outbreak.
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” Powell said in a statement. “The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
The highly unusual unscheduled announcement, issued while the stock market was still open, appears aimed at calming markets.
Stocks and bond yields in the United States were sharply lower again on Friday, putting major stock indexes on track for the worst week since the financial crisis.
The bond market and the futures market appeared to indicate that investors believe a rate cut will be necessary.
The futures market appears convinced that the Fed will cut rates sooner rather than later. Yesterday, fed funds futures implied no chance that the Fed’s benchmark interest rate target would be 50 basis points below the current target and a 47 percent chance that the target would remain unchanged. The odds of a 25 basis point cut stood at 57 percent, a dramatic increase from the 11 percent chance a week earlier.
Today, futures imply no chance that the target remains unchanged, around a 53 percent chance for a 25 basis point cut, and a 47 percent chance of a 50 basis point cut. Further out, fed fund futures indicate that there may be as many as four or five interest rate cuts this year.
The yield on the benchmark 10-year Treasury fell to a new record low of 1.155 percent. The yield on the 30-year Treasury fell to 1.664 percent. Yields on five-year, two-year, and 3-month Treasuries were all lower. Yields move in the opposite direction of prices, so a declining yield indicates investors are paying more for the debt of the federal government.