Traders triple their expectations of further interest-rate cuts as coronavirus fears snowball

AP Photo/Richard Drew

Traders are betting that coronavirus will force central banks to do what many have said they won’t in 2020: cut rates. 

Bloomberg reported that markets expect a 205-basis-point interest rate cut from seven major central banks by the end of this year – that’s three times the cut predicted at the end of 2019. Calculations were based on Bloomberg’s World Interest Rate Probability index. 

Traders are looking for at least two rate cuts this year, Bloomberg reported, even though when they were last polled, most members of the Federal Open Market Committee said they expected interest rates to stay the same throughout the year. 

Investors think that coronavirus will change that. Warning signs around the virus blared to start the week: The G-20 said Sunday that the virus, which has infected 79,500 and killed 2,627, could jeopardize global growth. The IMF also slashed its growth forecast for China over the weekend. On Monday, the Dow plummeted 1,000 points to start the morning. 

With markets selling off, investors have priced in at least one rate cut out of central banks in the UK, Canada, Australia, and New Zealand, Bloomberg reported. They think there’s a 50-50 chance that Europe and Japan will cut, too. 

Jay Bryson, chief economist at Wells Fargo, says not so fast. 

“For now, we are sticking with our forecast that the FOMC will keep rates unchanged through 2020,” Bryson wrote in a Monday note. “But this forecast rests on the underlying assumption that the COVID-19 outbreak remains more or less manageable,” he said, adding that “recent events raise credible questions about the validity of this assumption.” 

Though Jerome Powell said at the last FOMC meeting that the coronavirus posed “a new risk to the global growth outlook” and “warranted close watching,” the Fed ultimately decided at that meeting to keep rates unchanged. 

Cutting rates would require a material change in outlook, Bryson said, adding that even if that change does come, it won’t be apparent in the data immediately. If the Federal Reserve does cut rates, he wrote, it will be over the summer – after data has come through and ahead of the fall election season, when the Fed would rather not touch rates so as to avoid impacting the political process in either direction. 

History also suggests that the cut, should it happen, would be larger than 25 basis points, he said. The past six easing cycles have involve cuts of 75 basis points or more, he wrote.