Available, Easy Stimulus
March 3, 2020
Over the last several days, markets had priced in a 50bps Fed rate cut at the 3/18 meeting. Today’s off-schedule decision to move this forward by two weeks is getting less-than-positive initial market reaction for two reasons: 1) off schedule rate cuts feel a bit like panic rather than resolve and; 2) Financials are a ~13% weighting in the SPX and lower interest rates compress bank Net Interest Margins. The Fed decision was unanimous, but Powell’s brief press conference didn’t provide a good reason for the off-schedule cut other than ‘economic risks shifting materially’ as a result of the coronavirus. But as we noted yesterday, the steep decline in equities plus the widening of credit spreads resulted in tighter financial conditions. Year-to-date dollar strength also resulted in tighter financial conditions. Lowering the Fed funds rate, lowers the interest earned on cash, which eases US dollar strength. Yes, the Fed was reacting to markets, but that’s not a bad thing in this case. We expect the Fed will cut another 25bp cut at the April meeting, but avoid the so-called ‘zero bound interest rate’ when monetary policy no longer stimulates growth.