Fed Holds Rates Steady Amid Coronavirus Concerns

In meeting minutes released on February 19th, the Federal Reserve board signaled its intention to hold interest rates steady for the near term. The minutes -- from the FOMC's January 28-29 meeting -- were seen as supportive of loose monetary policy. Stocks and futures rallied as a result.

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Several Fed policymakers provided commentary on the Coronavirus outbreak that — at the time — was mostly contained to mainland China. Fed President Patrick Harker stated, “if the situation gets significantly worse, and we start to see a significant impact on the U.S. economy, then we’d have to think about accommodation.” Fed Chair Jerome Powell said that the Fed would act “as appropriate.”

 

Markets continue to read the Fed’s approach as broadly accommodative. Yet, some market participants note that the Fed may not be able to remain neutral for long. Apple stated early this week that the Coronavirus outbreak would cause the company to miss revenue estimates for the first quarter of the year. With many other companies dependent on Chinese consumers, some fear that a wave of negative revenue guidance is inevitable.

 

Aside from the impact on revenues, there are also concerns over supply chains. With so many American companies relying on Chinese-made parts, any further disruption in the manufacturing, assembly, or shipment of those goods may begin to impact companies in the U.S. 

 

Potential for a rate cut this year?

 

At present, the probability of an interest rate cut by June of this year is slightly above 50%. Yet, at least one Fed policymaker is downplaying the likelihood of a cut owing to the coronavirus.

 

In an interview with CNBC, St. Louis Fed President James Bullard noted, “There’s a high probability that the coronavirus will blow over as other viruses have, be a temporary shock and everything will come back.” Bullard continued, “Markets have to price that in, and that drags down the center of gravity a little bit. But if this all goes away, I expect that pricing will come back out of the market, and we’ll be back to the on-hold scenario.”

 

In addition to the coronavirus, the Fed must maintain focus on more traditional economic barometers as well. The spread between 2-year and 10-year U.S. Treasuries has inverted — typically a harbinger of bearish sentiment in the market.

 

US Treasury yields have tumbled amid fears that the spread of the coronavirus will slow the world economy. Risk-off sentiment typically results in market participants fleeing more risky investments such as stocks to seek the relative safety of bonds.