Markets bet Fed is pushed to cut rates in coronavirus response

Financial markets on Monday ratcheted up bets the U.S. Federal Reserve will be pressed to cut interest rates to cushion a feared hit to economic growth from the spread of the coronavirus, although one official cautioned against expecting the central bank to over-react to short-term market moves. U.S. interest rate futures surged to their highest levels since last fall as evidence the virus was spreading further outside its original epicenter of China spurred a global sell-off in stocks and panicked buying of government bonds. Wall Street recorded its biggest sell-off in two years.

The federal funds futures contract tied to the Fed’s July policy meeting FFN0 reflected a roughly 85% probability the central bank’s benchmark overnight lending rate would be at least a quarter percentage point lower after that meeting’s conclusion, according to the CME FedWatch tool. A month ago that was seen as a roughly 50-50 prospect.

Top U.S. central bank officials have signaled repeatedly that they see no need to cut rates further any time soon because they see the American economy performing well and it is too soon to judge the risk from coronavirus. Cleveland Federal Reserve President Loretta Mester was the latest to take note of the risk. In remarks to the National Association for Business Economics conference in Washington, she described the outbreak as a “big risk.”

On Friday, a survey of U.S. purchasing managers indicated that activity in both the services and manufacturing sectors appeared to have stalled this month because of the outbreak, which upended global supply networks when goods production in China ground to a halt. Apart from that report from IHS Markit, little evidence has yet to emerge of the virus denting U.S. growth, although economists have begun predicting it will. Goldman Sachs on Sunday cut its estimate for first-quarter gross domestic product growth to 1.2% from 1.4% because of the disruption to supply chains.

Markets bet Fed is pushed to cut rates in coronavirus response