With Coronavirus Cases Spiking, Here’s What to Expect From the Fed

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Stocks are now selling off hard again as a meaningful uptick in coronavirus cases takes hold. Just in time, the Federal Reserve said Wednesday it does not plan to raise interest rates until 2022 and now the market will be keen to figure out how much and what type of stimulus to expect should state reopenings slow. 

The S&P 500 fell more than 3% Thursday and is down more than 4% this week, almost halfway to a correction. U.S. high yield credit spreads are around 6% now, meaning investors are demanding roughly an additional 6% yield on sky bonds over the safe 10-Year Treasury bond, as the risk of defaults may rise. That's according to data from the St. Louis Fed.  

According to data from Johns Hopkins, the 5-day moving average of new virus cases is now 27,000, up from a prior reading of 11,000 earlier in month. States like Florida and Texas have seen a spike, which may cause these states to rethink reopenings.

Wednesday, the Fed said it will maintain its target federal funds rate at between 0% and 0.25%. Its dot plot shows almost all Fed members see the need for rates to stay stead through 2022. The plot shows a hope for rates reaching about 2.5% In the long-run, although the market isn't close to focused on that outcome. 

"The different facilities that they [the Fed] have outstanding -- they certainly can be expanded," said Steve Friedman, former staffer of the New York Fed and Macroeconomist at MacKay Shields. "If virus cases are indeed increasing, if states have to go back to some form of lockdowns, it really becomes a matter of fiscal policy. Fiscal policy needs to step up again and ensure that households have adequate cash flow," Friedman said 

Recently, some on Wall Street have grown cautious on stocks partly because the political will for a third round of fiscal stimulus may be fading after two rounds worth several trillions of dollars. 

Friedman does point out that risk asset spreads may not widen as much as they did in during the bear market in the first quarter of 2020 because the market has full confidence that the Fed is ever present and will buy corporate bonds in both the secondary and primary markets. High yield spreads reached 11% in March and the S&P 500's equity risk premium -- the stock market equivalent to a spread over treasuries -- reached 7%. Those are both sky-high, historically. '

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