Pressure Mounts on the Fed to Cut Rates to Combat Cornavirus

US Fed on quest for unicorn of monetary policy: the soft landing

Futures traders are certain that the Fed will cut its interest rate target by half a percentage point by the end of its next meeting in mid-March.

The odds implied by price in fed funds futures, which allow traders to speculate on changes in monetary policy, jumped to 100 percent for a 50 basis point–half a percentage point–rate cut. The contracts are built around the fed funds target at the end of Fed meetings but traders thinking a rate could come between meetings would trade contracts based on the next two-day meeting, which ends March 18.

A week ago, futures prices implied there was no chance of a 50-basis point cut and just a 20 percent chance of a 25-basis point cut. The odds of cut did not rise to better than even until later this year.

Fears that the economic impact of the coronavirus could be more severe than initially believed have dramatically changed financial market asset prices. Investors have pushed stock prices down into correction territory, big up bond prices so that yields hit record lows, and dramatically revised their views of monetary policy. Last week saw the biggest point drop for both the Dow Jones Industrial Average and the S&P 500 since October 2008.

On Monday, however, the market became so convinced that the Fed would drop its interest rate target to offset the drag from the coronavirus that major stock indexes rallied.

President Donald Trump has repeatedly called on the Federal Reserve to cut rates. He did so at a White House press conference Saturday afternoon.

“The big thing we are looking for is the Fed to do its job,” Trump said. “I don’t think the Democrats are going to approve any tax cuts.”
On Friday, Fed chair Jerome Powell issued a statement saying the Fed was closely monitoring the situation and stood ready to act.

“The coronavirus poses evolving risks to economic activity,” Powell said. “We will use our tools and act as appropriate to support the economy.”



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