Jeff Cox
A pedestrian walks past the Federal Reserve building on Constitution Avenue in Washington on March 19, 2019.
Leah Millis | Reuters
Traders
now expect the Federal Reserve to cut its benchmark interest rates by
three-quarters of a percentage point this month, even after the
reduction earlier this week.
Friday’s
stock market rout
and a fresh record low in government bond yields pushed traders to
assign a 65% chance of a 75 basis point cut by the March 17-18 Federal
Open Market Committee meeting, according to the CME’s FedWatch tracker.
There was zero probability assigned to that steep of a cut Thursday.
The
yield on the 10-year Treasury briefly fell below 0.7% as part of a
continuing fear trade sparked by uncertainty over the coronavirus.
If
the market is correct, the cut in the federal funds rate would take the
borrowing cost in short-term markets down to a range of 0.25%-0.5%. On
Tuesday, the
Fed announced a 50 basis point cut that put the current target to 1%-1.25%.
“We
knew the Fed at some point if we had a recession again would get the
funds rate to zero, and that is effectively being priced in,” said Mike
Collins, senior portfolio manager at PGIM Fixed Income. “There’s a very
good chance they cut a couple times more, maybe get to 50, maybe get to
zero at the end of this year and probably get stuck there.”
That
view got some support Friday, when various Fed regional presidents,
including New York’s John Williams, Boston’s Eric Rosengren and St.
Louis’ James Bullard all said the market is not wrong to expect more
central bank help if the coronavirus situation worsens.
In afternoon trading Friday, the market was pricing in a 0.53% funds rate, but that was drifting lower through the day.
The
possibility of the Fed going to zero, where it went in December 2008
and stayed for seven years, rose through the day Friday. Traders put a
35% chance of that happening by December, while also assigning a 12%
probability to the central bank reversing some of its cuts and going
back to a target range of 0.5%-0.75%.
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