Traders bet US Federal Reserve will cut rates in months ahead

Futures contracts reflected odds the US central bank will lower its key overnight lending rate by April.

US dollars
Federal Reserve policymakers, for their part, have shied away from calling explicitly for more fiscal stimulus, but more analysts have been making the case for it [File:Gary Cameron/Reuters]

Futures traders are betting the Federal Reserve will slash United States interest rates in the coming months to blunt damage to the world’s largest economy. The bet comes as governments and companies around the world are moving to control the spread of the new coronavirus by limiting travel and public gatherings.

Prices of futures contracts tied to the Federal Reserve’s key overnight lending rate at one point reflected better-than-even odds the US central bank will have lowered its key overnight lending rate to a range of 0 to 0.25 percent by the end of its April policy meeting, a level not seen since the 2008 financial crisis and its aftermath.

The Federal Reserve this week made an emergency half-percentage-point rate cut to help shield the US economy from the effects of the outbreak. Prices of rate-futures contracts suggested traders expected rates to be cut by three-quarters of a percentage point cut, to 0.25 percent to 0.50 percent, by the end of the March 17-18 meeting.

A rate cut helps the economy by easing financial conditions and supporting household and business confidence, Federal Reserve Chair Powell said earlier this week.

At the signing of an $8.3bn funding bill for vaccine research and public health prevention efforts, US President Donald Trump on Friday called for the US central bank to do more.

Federal Reserve policymakers, for their part, have shied away from calling explicitly for more fiscal stimulus, but more analysts have been making the case for it.

“Policy should focus on protecting the incomes of sick workers, including vulnerable groups like the self-employed, and supporting the eventual rebound in output,” Oxford Economics’ Gregory Daco wrote.

“If authorities decide to close schools, severely restrict travel and limit all nonessential movement, the US economy will fall into a recession – with zero [gross domestic product] growth in 2020 – putting an end to its longest economic expansion ever.”

Top White House economic adviser Larry Kudlow said on Friday the Trump administration may take targeted steps to stimulate the US economy amid the coronavirus outbreak, including help for workers who lose wages, but said the economy is not headed for recession.

Speaking in New York, Chicago Federal Reserve President Charles Evans said providing support to low-income workers who lose pay because of the outbreak is an effective way to boost the economy.

Many workers at the lowest rungs of the US pay scale work in service jobs that require face-to-face interaction with customers of the sort that has been severely curtailed in countries like China in their efforts to contain the virus.

The outbreak has killed more than 3,400 people and spread across more than 90 nations, with six countries reporting their first cases on Friday. The number of cases has crossed the 100,000 mark.

Everything on the table 

St Louis Federal Reserve President James Bullard said on Bloomberg Television that more action by the US central bank could come “at any time” as policymakers monitor the situation.

“Everything is on the table,” Bullard said. “We are willing to do more.”

The remark appeared to set the table for the Federal Reserve to start using bond-buying and other measures to shore up the economy.

During the 2008 financial crisis and its aftermath, the Federal Reserve bought trillions of dollars of Treasuries and mortgage-backed securities to push down long-term borrowing costs and get businesses spending and hiring again.

But with investors flocking to assets seen as safe amid uncertainty over how much economic damage the coronavirus epidemic will cause, the yield on the benchmark 10-year Treasury note has already sunk to record lows of well below 1 percent limiting the scope of any Federal Reserve bond purchases to do more to stimulate borrowing and spending.

Economists polled by Reuters news agency were evenly split on whether the Federal Reserve would cut rates or not next month, suggesting a lack of confidence that monetary policy is the right tool to use to fight a near-term economic slowdown driven by the virus.

Source: Reuters