Investors are betting the Federal Reserve will cut its benchmark interest rate by at least another 75 basis points either at or even before its next policy meeting, scheduled for next week, as the cascading impact from the coronavirus continues to afflict what appears to be unprecedented damage on the U.S. and global economies.
The CME Group's FedWatch tool, which assigns rate cut odds based on futures prices, suggested investors are pricing in at least a 67% chance of a 75-basis-point rate cut following the Fed’s scheduled March 18 Federal Open Market Committee meeting, a move that would lower the Fed's target rate to a range of 0.25% to 1%.
The Fed last week cut its benchmark lending rate by 50 basis points in a surprise decision designed to cushion the economic impact of the coronavirus. It was the biggest rate cut since the fall of 2008 and the first emergency rate move since the global financial crisis.
The move followed massive declines in U.S. stocks and a surge in bond yields not seen since the 2008 financial crisis, which spurred a Tuesday teleconference call among G-7 leaders and finance officials.
With markets plumbing to even greater depths since, a key question among investors and analysts at this stage is how effective additional rate cuts will be. A typical quarter-point move in the fed funds rate usually takes between nine and 12 months to filter down into the economy, as consumers begin to respond to cheaper borrowing costs.
More broadly, the overarching question for investors and analysts alike is what will be effective in offsetting what is increasingly being viewed as an unprecedented decline in economic activity, and more specifically, what kinds of fiscal response the government may introduce to encourage consumers and businesses to spend as spending accounts for more than two-thirds of U.S. economic growth.
To be sure, the Fed has already opened up its tool box wider to help keep order in financial markets.
The New York arm of the central bank this week said it will increase the size of its operations in the repo market, where investors exchange high quality collateral such as Treasurys for cash, to at least $175 billion in daily overnight loans, up from $150 billion offered earlier in the week.
The Fed will also provide at least $45 billion in two-week loans, twice a week, over the same period.
One sign of optimism was stability in the bond market, which takes its cues from the Fed. The yield on the benchmark 10-year Treasury note fell as low as 0.643% on Wednesday, according to Tradeweb. It then jumped as high as 0.86% following an auction of 10-year notes, dropped again and eventually settled at 0.817%, up from 0.743% at Tuesday’s close.
As of 8 a.m. ET, 10-year U.S. Treasury yields were at 0.695%.