The Fed, which had telegraphed last year that it could hold pat on rates through 2020, slashed rates as financial markets soured in the last week of trading in February. Over that time, the S&P 500 lost 8.9% and the Dow Jones Industrial Average fell 9.7%.
A boost on Monday arrived as the G7 telegraphed its intention to bring central bankers and finance ministers from the largest countries onto one phone call scheduled for Tuesday. Hours after the call on Tuesday, the Fed announced it had lowered its target for interest rates to a range of between 1.00% and 1.25%.
But prior to the move, Fed officials had been hesitant to commit to providing further accommodation and declined to say if the coronavirus had risen to the level of a “material change” to their economic outlook.
Markets continued to sour following the announcement, as the S&P 500 and the Dow Jones Industrial Average both slipped almost 3% into the closing bell on Tuesday. The U.S. 10-year Treasury fell below 1.00% for the first time ever, illustrating the continued flight to safe, fixed-income assets.
Several economics teams at the investment banks, including JPMorgan, Barclays, Bank of America, Société Générale, Goldman Sachs, are now expecting another 25 basis points of rate cuts in the Fed’s scheduled March 18 meeting.
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“Until morale improves, the easing will continue,” Barclays wrote on March 3. Barclays also expects another 25 basis point cut in the Fed’s in its April 29 meeting.
No Fed governors are scheduled to speak in the first week of March, but at least seven Fed presidents will make public remarks through March 6.
Here is a recap of the Fedspeak amid the coronavirus developments:
Monday, February 24:
Former Fed Vice Chairman Roger Ferguson: “It’s not 100% clear that having interest rates 25 basis points lower is likely to have a direct impact on the ability to manufacture goods or to get people back to work. And that’s one of the questions the Fed has to think about.”
Former Minneapolis President Narayana Kocherlakota: “I would urge an immediate cut of at least 25 basis points and arguably 50 basis points. That’s a cheap insurance policy for the economy that the Fed shouldn’t pass up.” (Bloomberg Opinion)
Cleveland Fed President Loretta Mester: Would like to keep interest rates “at current levels for a time.” Adds: “I just caution that you don’t want to overreact to the volatility in the markets if you’re a monetary policymaker.”
Fed funds futures contracts price in 80% chance of hold, 20% chance of 25 basis point cut
Tuesday, February 25:
Fed Vice Chairman Richard Clarida: “The disruption [in China] could spill over to the rest of the global economy. But it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook.”
Fed funds futures contracts price in 67% chance of hold, 33% chance of cut
Wednesday, February 26:
No Fed speeches
Former Fed Governor Kevin Warsh in a WSJ op-ed: “In a coordinated move alongside the People’s Bank of China, the European Central Bank, the Bank of England, the Bank of Japan and others so willing, the Fed should announce a 0.25-percentage-point interest-rate cut and make clear it’s open-minded about further action.” (WSJ)
Fed funds futures contracts price in 65% chance of hold, 35% of cut
Thursday, February 27:
Fed Governor Michelle Bowman makes remarks about community banking but makes no mention of the coronavirus.
Chicago Fed President Charles Evans: “We’re monitoring very closely and if we see something that does require an adjustment, I’m confident we would give that all the consideration it needs” (WSJ)
Fed funds futures contracts price in 42% chance of rate hold, 58% chance of 25 basis point cut
Friday, February 28:
St. Louis Fed President James Bullard in the morning: “Further policy rate cuts are a possibility if a global pandemic actually develops with health effects approaching the scale of ordinary influenza, but this is not the baseline case at this time.”
Fed Chairman Jerome Powell issues a statement 90 minutes before market close:
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
Fed funds futures contracts price in 0% chance of rate hold, 30.6% chance of 25 basis point cut, 69.4% chance of 50 basis point cut
Monday, March 2:
G7 central bankers and finance ministers will reportedly hold a conference call on Tuesday. (Reuters)
No Fed speeches
Fed funds futures contracts price in a 100% chance of 50 basis point cut
Tuesday, March 3:
Before market open, the U.S. Treasury releases a statement wrapping-up the G7 conference call: “G7 Finance Ministers and Central Bank Governors stand ready to cooperate further on timely and effective measures.”
10 a.m. ET: the Fed abruptly slashes interest rates by 50 basis points to a target range of between 1.00% and 1.25%. A statement detailing the unanimous decision: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.”
11 a.m. ET: Powell holds a press conference.
“The Committee judged that the risks to the U.S. outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.”
Cleveland Fed President Loretta Mester in the afternoon: “At this point, both the magnitude and duration of the economic effects of the virus are highly uncertain.”
Chicago Fed President Charles Evans in the evening: “The expectation is that it is going to be a relatively short-lived imprint on economic activity in the U.S.” (Reuters)
JPMorgan, Barclays, Bank of America, Société Générale, Goldman Sachs among banks predicting a further rate cut of 25 basis points on March 18
Wednesday, March 4:
The Bank of Canada lowers interest rates by 50 basis points to 1.25%.
Cleveland Fed President Loretta Mester: “I was fully on board with it, in the context of: this really could morph into something that could affect business and consumer sentiment and also investor sentiment.” (CNBC)
St. Louis Fed President Jim Bullard: “We were probably going to have to move at the March meeting anyway, might as well move it up and do it sooner.” Adds: “I’m not sure you should put a lot of weight on the March meeting right now anyway, we can meet inter-meeting anyway, which we’ve shown we can do.” (Bloomberg)
Fed Beige Book reports that the U.S. economy grew at a “modest to moderate rate” over past several weeks, but acknowledged the negative impact of the coronavirus on supply chains in addition to travel and tourism.
Fed funds futures contracts price in a 71.3% chance of 25 basis point cut, 28.7% chance of a 50 basis point cut on March 18
Thursday, March 5:
Dallas Fed President Robert Kaplan: “It is too soon to judge, I wouldn’t presume what we are going to do in the March meeting.” (Bloomberg)
Minneapolis Fed President Neel Kashkari: “For me, this was an insurance that we took out.” Adds: “If it turns out that the virus was not so bad, and it passes and the worst fears are behind us, we can always raise interest rates in the future, that’s easy to do.”
New York Fed President John Williams: Fed is “flexible and ready to make adjustments” to T-bill purchases and temporary repo operations "as needed.” Adds: 50 bps cut shows “close alignment” with other central banks.
Fed funds futures contracts price in an 81.6% chance of a 50 basis point cut, 18.4% chance of a 75 basis point cut on March 18
Friday, March 6:
Chicago Fed President Charles Evans: Central bank may want to target relief for those temporarily unemployed as a result of the coronavirus. “In most indications, the most effective tools would be getting some type of liquidity and funds in the hands of the people who need it the most.”
Cleveland Fed President Loretta Mester: Fed should consider expanding its policy-setting statements to explain economic risk. “Words are your friends, talking more in a statement that the committee votes on, I can’t believe would be a bad thing in this kind of environment.”
St. Louis Fed President James Bullard: “I think we'll have a slowdown for a while, it's unclear right now how severely.” Adds: “Markets seem to be pricing in the very worst outcome here and I'm not quite sure that's warranted.”
Boston Fed President Eric Rosengren: Quantitative easing may have “little room” with the 10-year Treasury yield already falling to all-time lows of 0.66% as of Friday morning. Adds that Fed could benefit from having the authority to “purchase a broader range of securities or assets.”
New York Fed President John Williams: “Heightened uncertainty causes people to pull back on investments, whether businesses or households.”
Kansas City Fed President Esther George: Central bank should be weary of the effects of quantitative easing. “More generally, to the extent that large-scale asset purchases succeeded in their aim of creating a wealth effect, they also played some role in contributing to elevated asset valuations.”
Fed funds futures contracts price in an 71.6% chance of a 50 basis point cut, 28.4% chance of a 75 basis point cut on March 18
Monday, March 9:
New York Fed expands repo market facility for overnight operations from $100 billion daily to $150 billion daily. Also expands two-week term operations from $20 billion to $45 billion.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.