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Why Stocks Are Lower After Fed’s Rate Cuts

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Stocks fell by midday Monday, just after the Federal Reserve announced interest rate cuts, on the heels of a worsening coronavirus situation, causing an economic shock in China and Europe.

All three major U.S. indexes were down Tuesday. The S&P 500 fell as much as 1.5%, with that loss moderating to 0.9% later on Tuesday.

Investors rushed into bonds, with the 10-year treasury yield falling to 1.039%, below the mid range of the new effective federal funds rate of 1.25%. The 2-year treasury yield fell below 0.8%, still below the Fed funds rate, which is abnormal post rate cut. The yield curve is no longer inverted, with the 3 month yield below 1%.

While investors wanted lower interest rates, as the virus can hurt the U.S. and not just the rest of the world, investors are nervous. 

The Fed is to meet March 18 and was expected to cut rates then. The market is viewing the seemingly premature 50 basis point cut — rather than 25 basis points — as evidence that the Fed sees worsening U.S. economic data, or at least the potential for it. 

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