Thursday, February 27, 2020

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Betting on a March cut from the Fed seems like a stretch

We’re less than three weeks out from the Federal Reserve’s next policy meeting.

The recent financial market turmoil — which saw the S&P 500 drop more than 7% from recent highs in just four trading sessions while the 10-year Treasury yield hit a record low — has prompted speculation the Fed could be compelled to cut rates in its March 18 announcement.

And former Minneapolis Fed president Narayana Kocherlakota wrote earlier this week that the Fed shouldn’t even wait this long to act: Kocherlakota thinks an immediate 25 basis point is a “cheap insurance policy for the economy that the Fed shouldn’t pass up.”

But recent comments from Fed officials don’t point towards the central bank accelerating its timeline for easing policy. Even if markets this week have raised their expectations for the rest of this year.

Fed vice chair Richard Clarida said Tuesday “it is still too soon to even speculate about either the size or the persistence of [coronavirus-related] effects, or whether they will lead to a material change in the outlook.”

Clarida added, “if developments emerge that, in the future, trigger a material reassessment of our outlook, we will respond accordingly.”

Ian Shepherdson at Pantheon Macroeconomics said Wednesday that Clarida’s comments made the vice chair sound “reasonably relaxed,” when it comes to coronavirus fears. And in Shepherdson’s view this indicates “more pain ahead” for investors.

David Zervos at Jefferies said Clarida’s comments show “there certainly seems to be some room for a policy error here,” and cautions that blindly buying the dip could leave investors burned if the Fed continues dragging its feet.

And while data from the CME Group indicated on Wednesday afternoon that odds for a March 18 rate cut have risen from less than 4% a month ago to around 41%, the distance between “act accordingly” and cutting rates is still considerable.

Earlier this week, Jay Bryson at Wells Fargo said that next Monday’s manufacturing data from the Institute for Supply Management “will be an important benchmark to judge the current state of the American manufacturing sector.”

“But the March 2 release probably will be too early to see much evidence of potential supply chain disruptions in the manufacturing sector,” Bryson adds, indicating the Fed will probably have little economic data to back up arguments for a rate cut in March.

“The committee could potentially cut rates at the April 29 meeting, but will it have enough evidence by late April to suggest that a ‘material’ change to its economic outlook is warranted?” Bryson asks.