The Federal Reserve cut interest rates this morning in an emergency move designed to protect the U.S. economy from the impact of the spreading coronavirus. The Federal Funds rate was cut by 50 basis points (bps) and now stands at 1.00%-1.25%. It was a rare intra-meeting move, coming only two weeks before the regularly scheduled meeting. In its statement, the Fed stated, “the coronavirus poses evolving risks to economic activity” and that they “are closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.” The market is expecting further rate cuts, with the futures market pricing in an additional 50 bps of easing by mid-year.
The Group of Seven nations (G7) also met this morning and echoed the Fed’s sentiment that they are “ready to take actions including fiscal measures where appropriate,” and central banks worldwide are expected to follow the Fed’s move in the coming days.
In our opinion, cutting rates now does little to stop the potential economic fallout from the virus. What it signals is a powerful message that the Fed will do its part to shore up confidence and put a bottom under the negative sentiment that has dominated markets over the past two weeks.
Currently, stocks are fluctuating between gains and losses as investors struggle with the effectiveness of the Fed stimulus. Treasury yields continue to fall, with the shape of the yield curve continuing to steepen, while spread product is slightly outperforming.
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