Fed’s Rate Cut Backfires, Analysts Forecast U.S. Interest Rate to Hit “Zero” This Year

The Federal Reserve announced an emergency rate cut last night by 50bp amid fears over an economic plummet from the spread of COVID-19.

 

The emergency action had not been introduced since October 2008 during the financial crisis, and now it was brought back amid an outbreak of COVID-19. The cut by another 50bp had brought US interest rate to a range of 1-1.25%.

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” said in the statement from the Fed.

Fed’s Chairman Jerome Powell stated that it is still unknown how long the economic slowdown caused by the virus outbreak would last, but the Fed will use tools and act appropriately according to the development of the situation, which means further cuts are possible.

 

Bank of America expects a total of 100bp in the first half of 2020. 25bp will be cut in the upcoming FOMC meeting on March 17-18, and another cut for 25bp will be made in April.

JP Morgan sees a 50% chance that the U.S. policy rates will be cut to zero this year, though not a cased-case view. Meanwhile, Goldman Sachs has the same view as the Bank of America, stating two cuts on March 18 and April 29 by 25bp each.

 

Last night, Dow Jones closed at 25,917.41, plunged by 2.94%, S&P 500 decreased 2.81% and Nasdaq dropped 2.99%.

Analysts suspected that the plummet was due to traders already priced in a rate cut in this month’s policy meeting while disappointing that there were no further stimulus plans introduced to fight the virus and stimulate the market, especially after the G-7 conference call which was held on Tuesday morning, not long before the Fed’s action.

The rate cuts are a medicine to boost the market, but this time, the med does not seem to be working when the market tanked instead of rising and fears grew as no other nations decided to step up as the Fed did. Meanwhile, in the U.S., not even the Congress, White House and Treasury announced any measurements. The state department could issue a stimulus package or lower the tax, but none of that happened last night.

ECB, BOJ and Bank of England will have a meeting this upcoming week, and analysts expect major central banks to announce a rate cut as well.