As US stocks continued their record-setting retreat, Federal Reserve chairman Jerome Powell finally issued a statement. It appears to have missed the mark.
“The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
Market chatter and bets on an interest rate cut by the Fed to put a floor on the market carnage have surged this week.
Some strategists are calling for an immediate, emergency cut of 25 basis points as early as next week; others are forecasting a 50-basis point cut at next month’s regularly scheduled policy meeting.
Mr Powell’s statement was terse. The test will be where US stocks close ahead of the weekend.
Kathy Jones, chief fixed income strategist at Charles Schwab, said her view of Powell’s statement is that “repeating the ‘as appropriate’ and ‘monitoring’ language doesn’t convey a sense of urgency to me. Seems like relatively standard messaging”.
Ms Jones also tweeted: “If you were expecting an ’emergency’ rate cut – seems unlikely. However, Fed wants you to know they are paying attention.”
In a note, Goldman Sachs expects 75 basis points of cuts by the Fed by June.
The yield on the US 10-year note was 13 points lower to 1.13 per cent at 3.22pm New York time on Friday.
As for US equities, the Dow was 2.9 per cent or 736 points lower at 3.23pm New York time – little changed from before Powell’s statement. The VIX surged 20 per cent to 47 as of 3.12pm.
In a note ahead of Mr Powell’s statement, Capital Economics’ Andrew Hunter said “the clear risk now is of an epidemic in the US”, adding: “While we can claim no expertise in epidemiology, a US epidemic could be enough to tip the economy into a mild recession.”
In a speech earlier this week Fed vice chairman Richard Clarida sought to highlight the central bank’s enduring optimism about the strength of the US economy. As per the coronavirus, Mr Clarida simply said it was too early “to even speculate” about the economic impact outside of China.
Earlier on Friday (Saturday AEDT), St Louis Fed boss James Bullard signalled the Fed was in no rush.
“We already lowered rates last year and that was billed as insurance against possible shocks and lo and behold we have a shock. We already took out the insurance,” Mr Bullard told the Fort Smith Regional Chamber of Commerce.
Mr Bullard also said the Fed wouldn’t be bullied by markets into cutting.
“I would not want to prejudge the March meeting,” Mr Bullard said. “Obviously the situation is very fluid and we are going to want to monitor events right up until the meeting…You do have to worry about the tail risk,” he said.
But “data suggest we are able to have a public health response globally that will bring the virus under control…The market pricing will reverse at that point…I am willing to react if that situation gets worse and there looks like there will be a major effect on the US economy, and I think it would be an effective response. But we would have to get to that juncture.”