March 3, 2020 / 3:26 PM / 3 months ago

Fed announces surprise rate cut to counter coronavirus impact

NEW YORK (Reuters) - The U.S. Federal Reserve cut interest rates on Tuesday in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus.

In a statement, the central bank said it was cutting the fed funds rate half a percentage point to a target range of 1.00% to 1.25%.

HIGHLIGHTS:

STOCKS: The S&P 500 seesawed and was last off 0.60%

BONDS: The 10-year U.S. Treasury note yield, spiked then turned lower was last at 1.0556%; The 2-year note yield fell to 0.7582%

FOREX: The US dollar index =USD was down 0.25%

COMMENTS:

JAKE DOLLARHIDE, CHIEF EXECUTIVE OFFICER, LONGBOW ASSET MANAGEMENT, TULSA, OKLAHOMA  

“I think it’s great the Fed has stepped in, it is fantastic in just showing solidarity.”

“The fear is that there is going to be a huge dip in consumer spending. This bull market is driven by the consumer so the coronavirus fear is that the consumer is going to be cut off from buying iPhones, steak dinners and buying Louis Vuitton, so the Fed stepping in gives the investor confidence that this bull market can continue.”

“This is the beginning of probably a very good week unless investors say they need to do 75 or a 100 (bps rate cut). Maybe when they meet in March, maybe they will cut more.”

“This is a bull market that has become accustomed to the Fed stepping in to save its day and the Fed did exactly that. As sinuous as the relationship it seems that President Trump and Chairman Powell have, they actually compliment each other really well. Trump complains and Powell steps in.”

CARL B. WEINBERG, CHIEF ECONOMIST, AND RUBEELA FAROOQI, CHIEF U.S. ECONOMIST AT HIGH FREQUENCY ECONOMICS IN NEW YORK (IN A NOTE TO CLIENTS)

“A Fed rate cut was expected in the markets, but no one expected it today.”

“Fed Chair Powell obviously knew this was a possibility when he participated in this morning’s teleconference with G-7 FinMins and central bank governors.”

“Maybe there is more substance to this morning’s teleconference than meets the eye?  Surely, market participants are hoping this is the case.  Markets are responding as if this were so.”

“The action of the Fed suggests that other central banks also may have urgent rate cuts or policy moves spring loaded.”

“If this is the start of a coordinated easing of global monetary conditions, then we should look for cuts by other central banks, perhaps during the course of the day today if equity markets tank again.  We can guess that other central banks may be poised to cut intraday like the Fed, maybe sequentially, if markets head south again.”

“HFE does not believe that cutting interest rates is at all constructive in resolving the supply shock induced by the coronavirus outbreak and the policy responses to it. However, the markets expected something out of the meeting, and this large surprise rate cut will engineer the big change in market confidence that the G-7 statement did not.  This is SOMETHING, not just monitoring and acting if appropriate.”

SEBASTIEN GALY, SENIOR MACRO STRATEGIST, NORDEA ASSET MANAGEMENT, LUXEMBOURG, (IN A NOTE TO CLIENTS)

“The impact on the S&P 500 is limited showing how far aggressive pricing of rate cuts had gone and we would expect another rate cut over the weekend.”

“The usual Fed put kicked in to compensate in part for the tightening of financial condition but mostly to avoid fear spreading like a disease through the economy as firms increasingly deal with shortages of parts.”

“The labor market had already shown some mild signs of loosening something likely to amplify going forward. The ECB is unlikely to follow through with a rate cut but like the Fed will start tweaking bank regulations to deal with what is a transient shock. Central banks are by nature stabilizers in the system and the Fed is showing the way and will be followed by others though as we have pointed out (and Blanchard) monetary policy can only do so many things.”

“The subdued reaction of the equity market suggests a typical buy the rumor and sell the fact and we continue to anticipate two weeks of high volatility in the markets in what is a liquidity event and only belatedly a credit one.”

QUINCY KROSBY, CHIEF MARKET STRATEGIST, PRUDENTIAL FINANCIAL, NEWARK, NEW JERSEY

“Even though we are worried, and rightly so, about domestic supply chains, the fact is that what the central banks are doing is at the margin help with keeping liquidity in the market, offering confidence and reducing the cost of capital, all of which are important in emergencies and if the economy were to slow down. Financial markets had expected the Fed was going to move decisively, Fed funds futures had that priced that in.

“By bringing down rates to such a low level the Fed is allowing lending to be extremely attractive, not just for consumers but small business owners. If consumers slow down you’re going to see some small business owners get into trouble. This can help and this is what the Fed can offer. What the Fed can do is at the margin help with psychology and confidence in the market.”

“Any company that depends on a supply chain within China, what you’re looking for is a scenario in which you see factories coming back online, workers back at work. You’re looking for containment of the virus, that’s the only way.

“The stock market has not discounted the possibility that the U.S. economy could stall to a lockdown.”

PETER KENNY, FOUNDER, KENNY’S COMMENTARY LLC AND STRATEGIC BOARD SOLUTIONS LLC IN NEW YORK

“The rate cut underscores the magnitude of the problem that the global economy is facing. It magnifies the problem that coronavirus presents to markets.”

“Normally, markets would welcome a rate cut, and they were hoping for it. Now that we’ve got it, the question is what’s next.”

MARK MCCORMICK, GLOBAL HEAD OF FX STRATEGY, TD SECURITIES, TORONTO

“This is definitely not good for the dollar. The Fed is reducing the cost of carry.”

“The question is, which countries have room for fiscal stimulus, and the U.S. does not in an election year. At the same time, there are not many central banks that can follow the Fed’s lead and take rates lower.”

CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC

“Clearly the Fed doesn’t want to fall behind the curve.  They’re trying to be proactive and front-load their response both by cutting 50 bps instead of their usual 25 bps as well as by cutting intra-meeting instead of waiting until later this month.”

ALAN LANCZ, PRESIDENT, ALAN B. LANCZ & ASSOCIATES INC, TOLEDO, OHIO

“I think it spooked investors after the strong rebound, because it was made right away and it was 50 basis points. So it was larger than people (were expecting), and some may be thinking, ‘Ooh, are things worse than we think?’”

MICHAEL PURVES, CHIEF EXECUTIVE, TALLBACKEN CAPITAL ADVISORS, NEW YORK  

“(The impact of the rate cut) remains to be seen, in the immediate term it is helping the markets. There are two major questions – what conditionality comes with this. Suppose the virus news gets better in April do they hike back? Or is it the elevator down, staircase up. Or maybe there’s no staircase up.

“I don’t quite understand the logic of the rate cut, it does obviously help reduce the cost of capital and helps mortgage rates, etc. But what is important is not that you have low interest rates on your screen,” but that credit conditions are robust for the people that need it.

“The things I’m watching closely is if the markets don’t really embrace this 50 bps cut, if the equity market says: ‘Oh ok, so what? It isn’t a vaccine,’ then I think there is a case to made that volatility will be supported at higher levels. I’ll watch high yield credit spreads and equity prices and the VIX.”

FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 27, 2019. REUTERS/Brendan McDermid

WILLIE DELWICHE, INVESTMENT STRATEGIST, BAIRD, MILWAUKEE

“It seems like an odd time to do it after yesterday’s bounce. It doesn’t do anything for the economy, but I think it probably helps the markets. The import of it is a messaging that we are in control and maybe everyone should settle down. The risk is the market shrugs it off.”

JUSTIN LEDERER, INTEREST RATE STRATEGIST, CANTOR FITZGERALD, NEW YORK

“I’m a little surprised. I didn’t expect that at 10 O’clock today, I thought you’d see something coordinated among central banks. The biggest takeaway from here is the steepening of the curve, the 2s/10s jumped almost 7 basis points. It’s a big, big steepening here… I’m surprised that it’s today. I’m not surprised that they went, but I thought it would be more of a coordinated and not out of the blue at 10 O’clock.”

Compiled by Alden Bentley

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