The fed’s “flash rate cut” on Tuesday failed to ease market tensions, with all three major U.S. stock indexes closing down nearly 3% and the dow dropping nearly 800 points. Spot gold jumped more than $50 on Tuesday on the back of investor risk aversion, while prices held firm in early Asian trading on Wednesday, briefly rising above $1,650 an ounce. With the federal reserve’s emergency rate cut, the bank of Canada is widely expected to cut rates tonight, possibly by as much as 50 basis points.
The federal reserve has cut interest rates in 12 years
The federal reserve cut interest rates in an emergency move Tuesday to protect the U.S. economy from the impact of a coronavirus outbreak. The rate cut, the first time the fed has acted outside a meeting since the financial crisis in December 2008, brings the benchmark rate down to a target range of 1 per cent to 1.25 percent.
“The fundamentals of the us economy remain strong,” the fed said in a statement. However, coronavirus outbreaks pose an evolving risk to economic activity. In view of these risks and in support of the objectives of maximum employment and price stability, the federal open market committee today decided to lower the target range for the federal funds rate.”
Fed chairman colin Powell later said the emergency rate cut came after officials saw the coronavirus was having a material impact on the economic outlook.
“The extent and durability of the impact on the U.S. economy as a whole remains highly uncertain and the situation remains volatile,” he said. Against this background, the committee judged that the risks to the us economic outlook had changed materially. In response, we have eased our monetary policy stance to provide more support to the economy.”
He said the fed would continue to watch the spread of the coronavirus and would adjust policy accordingly, although he suggested the response would be to cut interest rates rather than additional asset purchases or quantitative easing.
Asked if officials were considering other tools, Powell said: “in the circumstances, no. What we’re talking about is, is the current policy stance appropriate? We thought it was appropriate to make a change, and we did so today.”
Powell says there are signs that the spread of the virus has caused committee members to change their minds. “What really matters to us, of course, is not the epidemiology, but the economic risk,” he said. So we saw the risks to the economy and decided to act.”
After the fed’s announcement, the dollar index fell more than 60 points in the short term to a fresh session low of 96.92.
Danske said on Tuesday that the fed could cut rates by another 50 basis points this spring.
“Contrary to our expectations, the fed unexpectedly cut interest rates in an emergency before its March meeting,” said analysts at Danske. The fed’s current rate range is between 1.00 and 1.25%. “We believe the current situation will get worse before it gets better, so we see no reason not to cut rates further.”
“We expect the Fed to cut rates by another 50 basis points this spring,” said Danske. With the fed suddenly cutting rates between meetings now, it is hard to predict the timing and size of future rate cuts, but we believe the fed will cut rates by 25 basis points at the March 18 policy meeting and another 25 basis points soon after. “We believe that the second quarter-point rate cut will occur either at the April meeting or sooner, depending on the development of the outbreak and the impact on the economy.”
The fed action failed to calm fears that the dow had tumbled nearly 800 points
U.S. stocks fell sharply Tuesday in volatile trading, with the dow closing down nearly 800 points after the federal reserve’s emergency rate cut failed to ease concerns about a slowdown in economic growth caused by the outbreak of the new coronavirus.
The decision to cut rates by half a percentage point came two weeks before the fed’s planned meeting, as the central bank felt it needed to act quickly to combat the effects of the global spread of the virus. It was the first such emergency action on the sidelines of scheduled meetings since the financial crisis.
However, the fed failed to convince the markets. The CBOE volatility index, or VIX, fell briefly after Monday’s rally but rose to a nine-year high on Tuesday. The VIX rose as much as 20% in mid-afternoon trading.
CNN’s Fear & Greed Index, a seven-gauge gauge of market sentiment, is at its highest level of Fear: “extreme Fear”.
The dow closed down 785.91 points, or nearly 3%, at 25,917.41. Earlier Tuesday, the index rose more than 300 points. The s&p 500 fell 2.8 percent to 3,003.37 and the NASDAQ fell 3 percent to 8,684.09.
Instead, investors piled into treasuries, pushing the yield on the benchmark 10-year Treasury note below 1 percent for the first time.
Some market participants pointed out that the federal reserve unexpectedly announced a half-point cut in interest rates, the U.S. stock market more worried about the impact of the outbreak of pneumonia on the economy.
The rate cut highlights the fed’s concerns about the new coronavirus, which has spread around the world. The rate cut came two weeks ahead of the fed’s scheduled policy meeting, at which traders fully priced in a 50 basis point cut.
“It’s good that the fed recognizes there’s going to be weakness,” CNBC’s Jim Cramer said on “Squawk on the Street. But it makes me think the weakness must be much worse than I thought. I’m very nervous now. I’m more nervous than ever.”
Brian Wesbury, chief economist at First Trust Portfolios LP, tweeted that the fed rate cut was unnecessary and caused panic. It cannot fix the virus, nor will it fix the market or the economy.
‘the market actually fell after the fed cut rates,’ wrote Ramp Capital LLC. It is time, it quips, for the fed to raise rates across the board.
When the fed decided to cut rates by 50 basis points outside its regular meeting, it looked like a crisis, notes currency strategists at nordea bank.
Currency trader Caxton Fx said the fed was under market pressure to cut rates again. It would be a bloodbath if the market continued to fall.
On March 3, local time, who released the latest daily report on the situation of new coronary pneumonia. As of 10 a.m. Central European time on March 3 (17:00 Beijing time), a total of 166 deaths and 10,566 cases of new coronary pneumonia had been confirmed in 72 countries outside China.
Compared with the previous day’s report, there were 1,792 new cases of coronary pneumonia outside China, and 8 new cases of coronary pneumonia occurred in eight countries (Andorra, Jordan, Latvia, Morocco, Portugal, Saudi Arabia, Senegal and Tunisia).
Gold briefly surged above $1, 650
Gold prices rose on Tuesday after the federal reserve cut interest rates by half a percentage point in an emergency response to a growing economic threat from a new coronavirus.
It was the first emergency rate cut since the financial crisis. At the same time, Wall Street has been through a period of turmoil and U.S. President Donald trump has been pressuring the federal reserve to lower interest rates to remain competitive with other central bank policies around the world.
Spot gold closed Tuesday up more than $50, or more than 3 percent, at $1,640.30 an ounce. Spot gold remained strong in early Asian trading on Wednesday, briefly breaking above $1,650 an ounce and peaking at $1,652.38 an ounce.
‘gold has rebounded strongly and managed to hit our first waiting target of $1,633.60 an ounce, and has broken through that level,’ wrote Economies.com.
Gold is now trading above $1,683.60 an ounce, supporting expectations of continued bullish trends for the day and in the short term, and paving the way for a further $1,689.33 an ounce price target, Economies.com said.
With gold closing above $1,633.60 a Troy ounce, that would confirm a continued rally in the coming sessions, according to Economies.com.
The bank of Canada is set to cut interest rates tonight
After the fed’s surprise emergency rate cut, the market is still pricing in a 68.6% chance of a further quarter-point cut to 0.75% to 1.00% in April, according to CME fed watch.
The UK money markets are now fully pricing in a 25 basis point cut in March from an earlier 85 percent chance.
Eurozone money markets are now pricing in a 90 percent chance that the ECB will cut rates by 10 basis points next week, up from just 75 percent earlier in the day, according to ECB watch.
The bank of Canada will announce its decision on Wednesday at 23:00 Beijing time. Money markets are pricing in a 40 percent chance that the bank of Canada will cut rates by 50 basis points.
Economist Michael Brown said he expected a bank of Canada rate cut on Wednesday to be a foregone conclusion, with the question of whether to cut by 25 basis points or 50.
The bank of Canada is expected to cut interest rates by 50 basis points on Wednesday, up from a previously expected 25 basis points, the Canadian imperial bank of commerce wrote on Tuesday.
Analysts at CIBC said: “the fed did it today, but not by 50 basis points as we had expected, but surprisingly they didn’t wait for this month’s policy meeting, which is only about two weeks away. It shows that the fed is concerned about the current situation.”
CIBC analysts added: “for the bank of Canada, a rate cut this week is inevitable, but certainly not between policy meetings, which have opened the door to a 50 basis point cut. We had expected a quarter-point cut this week, followed by another half-point cut in April. But given how aggressively the fed has acted, we have changed our current expectations a bit (e.g., a 50 basis point cut tomorrow and another 25 basis point cut in April). Canada has not yet seen the same level of community-driven transmission as the United States, but given the transportation links between the United States and Canada, an outbreak in Canada is unlikely to be avoided.”