Financial markets Monday ratcheted up bets the U.S. Federal Reserve will be pressed to chop rates of interest to relax a feared hit to economic development from the spread of the coronavirus. However, one delegate cautioned against anticipating the central bank to over-react to short-interval market moves.
U.S. rate of interest futures soared to their highest ranges since last fall as proof the virus was spreading outside its epicenter of China spurred a worldwide promote-off in shares and panicked shopping for of presidency bonds.
The federal funds futures contract linked to the Fed’s July policy meeting FFN0 mirrored an almost 85% probability the central bank’s benchmark in a single day lending rate could be at least a quarter percentage point lower after that meeting’s conclusion, in line with the CME FedWatch software.
Contracts expiring in early 2021 had been priced for a Fed policy rate of around 1% or lower, in contrast with the current level of between 1.50% to 1.75%, where it resides after three price cuts in 2019.
Top U.S. central bank delegates have repeatedly indicated that they see no need to pare rates further since they see the American economy performing well, and it’s too soon to judge the threat from coronavirus.
Cleveland Federal Reserve chief Loretta Mester was the newest to take note of the threat. In comments to the National Association for Business Economics conference in Washington, she called the outbreak a “big risk.”
However, Mester pushed back against the notion that the Fed can be pushed to act in response to nervous financial markets.