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How the Fed left investors wanting more

Myles Udland
Markets Reporter

The Federal Reserve shocked markets on Tuesday morning after cutting its benchmark interest rate by 0.5%.

This was the central bank’s first inter-meeting cut — meaning unscheduled policy change — since October 2008.

Citing the coronavirus and the virus’ “evolving risks to economic activity,” the Fed sent a clear signal to markets that this is a serious situation.

But in a press conference following the Fed’s announcement, Fed chair Jay Powell seemed to somewhat limit the scope of how the Fed could proceed in the months and weeks ahead. And the market on Tuesday was less than thrilled.

After swinging wildly from losses to gains following this initial announcement, stocks were off more than 1.2% across the board in afternoon trading with yield on the 10-year Treasury moving to a record low.

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“In the current context, no.”

As noted by Bloomberg’s Luke Kawa, Powell said Tuesday that Fed didn’t discuss anything other than cutting rates in its discussions ahead of this announcement.

In response to a question from the Financial Times’ Brendan Greeley about “other tools” the Fed could use to combat coronavirus-related weakness — like, for example, embarking on a new quantitative easing program — Powell said: “In the current context, no.

“What we discussed is the current stance of policy, is it appropriate, [and we] came to the view that it was appropriate to make a change and went ahead and did that today.”

Perhaps a disappointment for investors who might’ve seen this Fed announcement as a redux of the ECB’s 2012 pledge to do “whatever it takes.”

Now, just because Powell didn’t explicitly reference internal Fed conversations about further rate cuts or a new asset purchase program doesn’t mean they are off the table. As the financial crisis showed investors, the Fed’s toolkit can be deeper and more creative than consensus forecasts.

U.S. Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve cut interest rates in an emergency move designed to shield the world's largest economy from the impact of the coronavirus, during a news conference in Washington, U.S., March 3, 2020. REUTERS/Kevin Lamarque

And economists don’t think Tuesday was the end of anything when it comes to Fed action.

Economists at JP Morgan, for example, said Tuesday they expect further rate cuts from the Fed in its March 18 policy announcement. The economics team at Wells Fargo sees the Fed cutting rates by another 50 basis points before the end of the second quarter.

And Tuesday’s market reaction indicates the pressure will remain on the Fed. As Powell has said many times, the Fed will “act as appropriate” in adjusting its policy stance. The emphasis from investors now is on the first word in that statement.

That Tuesday’s emergency cut was the right first step, however, is far from a settled issue.

Chris Rupkey at MUFG said Tuesday that the Fed’s rate cut “looks rushed to us and not properly considered.”

“Moving between meetings with a bigger than normal interest rate cut looks like Fed officials are panicking as much as stock market investors did last week. They did not need to be so aggressive and the Fed under Powell keeps responding wrongly in our view more to the financial markets than they are to the broader economy,” Rupkey added.

“Getting out in front of the risks sounds good on paper as a strategy for monetary policy, but it did not work under Fed Chairman Bernanke where early big rate cuts did not stop the Great Recession.”

Myles Udland is a reporter and anchor at Yahoo Finance. Follow him on Twitter @MylesUdland

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