The Fed cut rates on Tuesday morning, bowing to market demands for emergency action in the face of the coronavirus outbreak, which increasingly looks like an existential threat not just to the global economy, but to humanity more generally.
Markets had spent the last week effectively backing Jerome Powell into a corner, pricing in nearly 50bps worth of easing for the March meeting, and, at one point, four cuts by the end of 2020.
For once, the beleaguered Fed chair didn’t wait around. The Fed on Tuesday morning delivered a 50bps, inter-meeting rate cut, the first emergency move since the crisis. Here’s the short statement:
The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.
The vote was unanimous and it brings the total amount of easing since last summer to 125bps.
Stocks initially surged, then fell, then chopped around, as traders struggle to price what they’ve ostensibly spent days preparing for. Again, this was already priced into money markets. Now we’ll see how much of Monday’s surge in US equities was attributable to the “baking-in” of a large Fed cut.
Earlier, market watchers reached into their desk drawers, pulled out their red panic buttons and pounded them, after Tuesday’s 14-day term repo was more than three times oversubscribed. The New York Fed took $20 billion of securities in the operation, while dealers submitted $70.95 billion.
A half-hour later, the overnight operation was oversubscribed too. Dealers submitted $108.608 billion of bids for the $100 billion on offer.
That was the first oversubscribed O/N operation since October. The Bank of Japan conducted two unscheduled repo operations this week in a bid to send a message to markets.
The Fed is, of course, engaged in an ongoing effort to reduce the size of its repo operations in order to extricate itself from the market plumbing as monthly T-bill purchases absorb the existing repo stock.
All of this comes amid concerns that liquidity injections and monetary easing won’t be sufficient to offset a biological threat. A perfunctory statement issued after a teleconference with G-7 finance ministers and central bankers failed to inspire confidence. Presumably, Powell communicated the Fed’s intentions on that call, and today’s move makes cuts from the ECB and the BOE more likely. Money markets are now pricing around 27bps of easing from the BOE this month. The RBA cut rates overnight.
NatWest’s Michelle Girard said in a Tuesday note that in addition to a 50bps inter-meeting cut, the Fed may well move again at the regularly-scheduled meeting later this month, and then again in April and June on the way to zero by mid-year. Girard sees the resumption of QE proper as likely.
“We doubt today’s policy action will trigger a meaningful boost to aggregate demand, but implementing rate cuts may help to mitigate some potential strains in the financial system and give a lift to sentiment”, ING said, in a quick reaction. “We are penciling in two further 25bp rates cuts for 2Q giving a total of 100bp of easing”.
“The Fed must further ease”, Donald Trump said, minutes after the decision.
|Deal Date: Tuesday, March 03, 2020
Delivery Date: Tuesday, March 03, 2020
Maturity Date: Wednesday, March 04, 2020
Type of Operation: Repo
Auction Method: Multiple Price
Settlement: Same Day
Term of Operation – Calendar Days : 1 Day
Term of Operation – Business Days : 1 Day
Operation Close Time: 08:45 AM
Deal Date: Tuesday, March 03, 2020