(Reuters) - The U.S. central bank will move aggressively to cut borrowing costs as soon as next month, trimming an extraordinary three-fourths of a percentage point by mid-year to cushion the world’s biggest economy from the impact of the coronavirus, traders of futures contracts tied to the Federal Reserve’s policy rate are now betting.
Traders are pricing in a 72% chance of a quarter-point rate cut at the Fed’s March meeting, and better than even odds of two more such rate cuts by the end of July, according to CME Group’s FedWatch, which translates fed funds futures pricing into traders’ monetary policy expectations.
That’s up from a 33% chance of a March rate cut seen on Wednesday, before U.S. President Donald Trump appointed Vice President Mike Pence to head public health efforts to contain the virus’ spread.
Fed policymakers have so far taken a wait-and-see approach, saying that after cutting rates three times last year they want to see a “material change” in the economic data before they take further action.
“The Fed’s desire to be data-dependent may capitulate to market sentiment,” said Jon Hill, an interest rates strategist at BMO Capital Markets.
Some major U.S. corporations say the virus is already weakening their balance sheets, raising questions about whether those symptoms could be enough to justify a rate move.
Best Buy Co Inc (BBY.N) on Thursday lowered its forecast for annual profits, citing a slowdown in manufacturing by electronics companies that could hit sales. And last week, Apple warned it could miss revenue targets for the first quarter of 2020 because of production in manufacturing sites in China was lower than expected, limiting global iPhone supplies.
Worries about the spread of the coronavirus have also contributed to a drop in inflation expectations, a trend policymakers are battling out of concern that low rates leave them with less ammunition to counter the next downturn. Fed Vice Chair Richard Clarida said on Tuesday that inflation expectations were “at the low end of a range I consider consistent with our price-stability mandate.”
The 5-year, 5-year foward breakeven inflation rate: here
Leaders around the world are rallying their nations to prepare for an epidemic of the flu-like illness that originated in China, has killed 2,800 and infected about 80,000.
New cases outside of China in the past 24 hours surpassed those in mainland China, where spread of the pathogen is on the decline after an aggressive containment campaign that included travel limits and factory shutdowns.
Reporting by Ann Saphir and Jonnelle Marte, additional reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama and Nick Zieminski