How Many Times Will The Fed Cut Rates In 2020?

The 7.6% decline in stocks pushed the number of cuts expected in 2020 to nearly three. That’s significantly different from recent Fed rhetoric. The Fed recently stated it was fine with current policy and wanted to see how its cuts last year impact the economy before taking any action. The chart below shows the wide chasm between the Fed’s guidance and the Fed funds futures market. As of December, the Fed was expecting rates to go higher within the next couple years.

While the Fed funds futures market doesn’t have a great track record of predicting intermediate term rates, it is accurate in the short term. The Fed will need to express a willingness to cut later in 2020 at its March meeting or markets will revolt. We’ve seen the expectations for cuts increase when stocks fall, but not decline nearly as much when stocks rise. Therefore, if the stock market reverses its losses related to the coronavirus, traders will still expect at least 2 more cuts this year.

The elephant in the room is what the Fed will do once a recession hits. It could be back where it started its hike cycle if it keeps cutting rates during this expansion. The market is pricing in 0.9% rates. If the economy enters into a recession with the Fed funds rate at 0.9%, there is little room for it to cut without going negative. Assuming a recession doesn’t occur this year and the Fed does cut, the closeness to the zero bound will be a hot topic in 2021.

This clearly wasn’t an adjustment to Fed policy. It’s a new cut cycle. The coronavirus helped make sure of this just as the trade war exited the discussion. Even though we’ve seen inklings of an acceleration in growth, weakness related to the coronavirus will likely cover that up. The Fed actually has a better track record of predicting monetary policy than the futures market, but we think guidance in March will be impacted by the futures market. If the Fed doesn’t turn dovish, we will probably see the yield curve invert.

1 2 3
View single page >> |

Disclaimer: Please familiarize yourself with our full disclaimer here.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.