- With stocks tumbling and the coronavirus spreading, traders are pricing in a better than 50% of two rate cuts this year.
- Fed officials have indicated they are on hold, though Chairman Jerome Powell said he is “carefully monitoring” the virus outbreak.
- “The Fed won’t divorce itself from the human aspect of this. But it will be about growth and whether or not this affects growth,” said Quincy Krosby, chief market strategist at Prudential Financial.
Federal Reserve officials this week affirmed their commitment to staying put on interest rates for the time being, but markets have other ideas.
The fed funds futures market, where traders go to bet on the central bank’s policy direction, is pricing in about a 58% chance of a rate cut by June, according to the CME’s FedWatch tool. Traders are even making room for two cuts, assigning a nearly 60% chance of another move lower in December.
Expectations for an easing have accelerated as the coronavirus has begun to spread globally and threatens to dent China’s already decelerating growth. Stocks have surrendered their January gains and bonds are again flashing a recession signal through an inverted yield curve.
Markets, then, might be bracing against the chance of a contagion both medically and economically.
“The Fed won’t divorce itself from the human aspect of this. But it will be about growth and whether or not this affects growth,” said Quincy Krosby, chief market strategist at Prudential Financial. “China is the second-largest economy in the world. If demand in China slows, it’s going to affect some of the larger trading partners. It won’t just be the U.S. That could stymie attempts of monetary and fiscal stimulus to bolster global growth.”