The Federal Reserve could slash interest rates to zero, Goldman Sachs economists predicted Friday, as Wall Street looks for support following its worst week since the global financial crisis and ahead of what is likely to be a rapidly accelerating coronavirus outbreak in the United States.
With most investors pricing in at least a 50 basis point cut from the Fed next, which would take its main interest rate to a range of 0.25% to 0.5%, a growing plurality is looking for a full 1% cut from Chairman Jerome Powell when it wraps up its two-day meeting on March 18.
That plurality includes Goldman's chief economist, Jan Hatzius, who thinks the full 1% cut should be made in one go, rather than spread over two meetings in April and May, in order to address some of the immediate issues the U.S. economy is facing from the coronavirus pandemic.
“In light of the continued growth in coronavirus cases in the U.S. and globally, the sharp further tightening in financial conditions, and rising risks to the economic outlook, we now expect the FOMC to cut the funds rate 100 basis points on March 18," Hatzius argued in a client note.
Financial markets are certainly under stress: The Dow had one of its biggest declines on record yesterday, falling more than 2,300 points s stocks around the world lurched lower amid the rapid advance of the virus and the economic damage it is likely to leave it its wake.
The moves have taken the S&P 500 some 27% from their recent peaks -- recorded in only sixteen days -- in what is being described as the fastest bear market correction in history.
Not all of Wall Street, however, is convinced that the blunt instrument of interest rate cuts will provide the support markets need.
Hedge Fund manager David Tepper, who predicted the market's reaction to a coronavirus outbreak in early February, wants the Fed to launch a targeted quantitative easing program, with $200 billion in bond and mortgage purchases.
That approach might worry Fed Governors, however, after having seen European stocks fall the most on record following the European Central Bank's decision to focus its support strategy on bond purchases purchases and loan support programs while leaving interest rates unchanged.
"As Christine Lagarde said, she had no intention of having her own 'whatever-it-takes' moment. This is a package aimed at supporting the banks and preventing the sort of credit crunch that we saw in 2008," said ING's chief economist, Carsten Brzeski. "In fact, it is highly questionable whether any big bazooka would help, at least not right now."
"The only thing which could really stop fear, uncertainty and turmoil would be a vaccine and certainly not monetary policy easing," he added.