Coronavirus raises odds of Fed rate cut: experts

The probability of the U.S. Federal Reserve issuing another interest rate cut is increasing, economists say, and the spread of the coronavirus may very well lead to the central bank speeding up that decision.

According to the CME Group’s Fedwatch Tool, which uses futures to calculate the Fed’s next move, the probability of a rate cut occurring in June now sits at 37 per cent and is up nearly 15 per cent since the beginning of the year. In July, that number shoots up over 50 per cent.

The coronavirus, which has infected more than 24,000 people, has certainly played a role. Fed chair Jerome Powell said in a press conference following the central bank’s January meeting that he was “very carefully monitoring the situation” and that it was likely to have an economic impact.

Scotiabank chief economist J.F. Perrault already has a Fed interest rate cut priced in for the third-quarter of 2020. The impact of the coronavirus, he said, could mean that it comes sooner than expected. “What the virus does is two things: It gives us more confidence the Fed will cut and if you’re responding to the negative impacts of an event happening now ... you’ve got to do that sooner rather than later,” Perrault said.

Central banks are notoriously slow to react, however, and Perrault said that the challenge for the Fed is that much of the economic data for February that they would need to make a decision on policy isn’t available until April or May.

Although the Fed will also be tracking the number of patients infected with the virus in the U.S., those won’t need to balloon to merit another cut, Perrault said. Fear alone could lead to a drop in the tourism, food and retail sectors, he said.

Philip Marey, the senior U.S. strategist for the Netherlands-based Rabobank, expected the Fed to cut interest rates to zero since the beginning of the year, either to stop the U.S. from entering a recession or as a response to one. The impact of the coronavirus has also convinced him that the Fed is about to do away with its neutrality and move again towards hawkish policy.

As for the Bank of Canada, Capital Economics economist Stephen Brown wrote in a note that it may have issued a rate cut when SARS broke out in 2003, but he doesn’t see the same scenario because it may not want to heat up the housing market. Financial Post