March FOMC Meeting and Coronavirus (COVID-19) Impact on Interest Rates

The Fed initiated an emergency interest rate cut to combat the economic impact of coronavirus (covid-19)

Last week, the Federal Reserve cut its policy rate target by half a percentage point in emergency, inter-meeting fashion. Inter-meeting rate cuts have been relatively rare in the past, with the most recent ones being in reaction to the 2008 financial crisis, the 9/11 attacks, and in the wake of the dotcom bust.

This emergency rate cut was followed by heavy volatility in stocks and sent 10-year treasury rates below 1% for the first time ever. Other global leaders have also made emergency moves that signal a combined effort to prevent a worldwide recession as a result of the novel coronavirus (COVID-19) outbreak. So, what is the Fed expected to do at its next scheduled policy meeting on March 18th?

History of Inter-Meeting Rate Cuts

The past six times the Fed made an inter-meeting rate cut were all followed by another cut at the subsequent meeting. The issue with this strategy is the lower band of the federal funds rate already sits at 1%. Some central bankers are open to the idea of negative interest rates as a possible tactic. However, this strategy generates reason for concern, as ultra-low rates in other countries, such as Japan, have proven to be difficult to exit.

Some pundits are also doubting the usefulness of a rate cut when the main issue is a medical emergency. Lower rates aren’t likely to affect people’s willingness to travel, but they may open the door for cheap fiscal stimulus from the largest nations.

How will COVID-19 and the emergency interest rate cut impact economic data?

Entering 2020, the Fed had projected the policy rate would remain unchanged for the entire year and that we should see a pick-up in inflation combined with low unemployment. The first couple months followed that plan with inflation making moves in the right direction and the job market pulling even more Americans into the workforce.

The coronavirus outbreak is disrupting those plans. Quarantines and closures in many parts of the world are impacting global supply chains. The effect of coronavirus on the global economy will likely not be seen in the numbers until March’s monthly indicators are released, but the numbers that have been released thus far are painting a grim picture.

Should we expect another interest rate cut at the March FOMC meeting?

According to the Atlanta Fed, markets are expecting a 25-50 basis point cut at this month’s FOMC meeting. The White House is supporting this case by urging the Fed to drop rates. In recent days there have been mentions of plans to initiate a large fiscal response to help mitigate coronavirus impact to the U.S. economy, but the details have not yet been announced. Over the course of 2020, rates are expected to stay near zero.

The Fed is in a challenging situation going into its policy meeting. The rate cut last week seemed to have awakened investors’ worries about the coronavirus outbreak, and some fear that the worry created by the move outweighed the benefit.

With a ballooned balance sheet and near-zero rates, Federal Reserve bankers are left with little monetary ammunition. Will they discharge it as quickly as the market predicts? The markets will know the answer to this question very soon.

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