Fed cuts rates in surprise move

Fed cuts rates in surprise move
The market’s immediate reaction was positive, but the ultimate impact of this ‘insurance cut’ is unclear.

In a surprise inter-meeting move on the morning of March 3, the Federal Reserve (Fed) announced a 50 basis point cut in US interest rates to the range of 1% to 1.25%, attributing the cut to the evolving economic risks from the coronavirus. 

The Fed decided to cut rates on its own, without a coordinated move by other major central banks, after the G-7 conference call earlier on March 3. The Fed had the most room to move, as US rates were higher than those in the other G-7 countries.

The market had been expecting a rate cut at the next Federal Open Market Committee meeting, but the inter-meeting timing of this cut caught the market by surprise. Immediately following the announcement, fed fund futures rallied, indicating that the market expects to see additional rate cuts, and short-term rates fell faster than long-term rates, steepening the yield curve. 

The economic impacts of the coronavirus are mostly yet to come in the United States and are highly uncertain. From that perspective, we view the Fed’s move as a type of “insurance cut.” Going forward, we expect markets to be driven by growth expectations in the face of the spreading virus. The Fed move on its own will likely have little impact on the path for economic fundamentals in the near term, and hence the ultimate impact of this move on risk markets is unclear at this stage.

Rob Waldner is Chief Strategist and Head of Macro Research for Invesco Fixed Income (IFI).