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Federal Reserve slashes rates to crush coronavirus fears and may have just spooked Wall Street

·Anchor, Editor-at-Large
·3 min read
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The market has been given its coronavirus vaccine compliments of Dr. Powell, experts say.

Following a meeting among G7 leaders that included Fed chief Jerome Powell and U.S. Treasury Secretary Steven Mnuchin — in which the communique initially let investors down — the Fed shocked Wall Street by slashing interest rates by 50 basis points around 10:00 a.m. ET. The Fed said the “fundamentals of the U.S. economy remain strong” but that the coronavirus “poses evolving risks to economic activity.”

Powell strongly signaled Friday a move on interest rates perhaps earlier than the Fed’s mid-March meeting. Stocks aggressively pared their losses on his original comments on Friday, rallied 1,200-plus Dow points on Monday and initially popped on the cut Tuesday morning. But gains were quickly pared, with the Dow falling close to 110 points by 10:20 a.m.

Several Wall Street sources told Yahoo Finance the reversal in stocks reflect concern the more aggressive rate cut (and the fact we got one before the formal meeting) suggests the Fed is seeing a sharp slowdown in U.S. growth at the hands of the coronavirus.

“For the Fed to do something it has got to show some considerable concern about the actual economic impact [of coronavirus] and not just headline risk,” Wells Fargo rates strategist Zachary Griffiths tells Yahoo Finance.

Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee on Capitol Hill in Washington, Wednesday, Feb. 12, 2020, during a hearing on the Monetary Policy Report. (AP Photo/Susan Walsh)
Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee on Capitol Hill in Washington, Wednesday, Feb. 12, 2020, during a hearing on the Monetary Policy Report. (AP Photo/Susan Walsh)

Some also speculated the Fed is running out of bullets to fight deflationary forces in the U.S. economy given that rates were already lowered three times ahead of 2020.

Others think the Fed cut is a major buying opportunity, however, given how stock prices often react very favorably to easier monetary policy.

“If this doesn’t keep the market elevated, we’re looking at a bear market,” Miller Tabak strategist Matt Maley told Yahoo Finance. Maley added the cut is “definitely” a buy signal.

[Take our quick poll: Do you think the stock market has bottomed?]

SunTrust Chief markets strategist Keith Lerner was a bit more measured in the aftermath of the cut.

“This cut should help to ease financial conditions and provides some confidence that the Fed is being vigilant. It’s positive on the margin, but does not dramatically change our stock market call. The big buy signal was hit last week after the selloff, and probabilities suggest the path higher over the next 12 months is higher,” Lerner told Yahoo Finance. “However, this Fed move doesn’t change our thesis that the repair process will take time, with wide price swings in both directions. The next few weeks should remain bumpy. Coronavirus headlines will likely continue to drive day-to-day action and the election will also have an impact as we move past Super Tuesday.”

Yahoo Finance’s Brian Chueng contributed to this story.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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