Fed suddenly cut rates to mitigate coronavirus

The US Federal Reserve cut interest rates on Tuesday to protect the world’s largest economy from the effects of the coronavirus epidemic.

The Fed said in a statement that the target range of federal funding rates has been reduced by 50 basis points to 1.00-1.25% per annum.

The S&P 500 stock index jumped after the Fed announced its decision, but then returned to decline. By 18:46 Moscow time, the index rise was 0.58%.

The US dollar against a basket of major world currencies fell by 19:03 by 0.4%.

“The decision of the US Federal Reserve will have consequences for the Russian Central Bank. Following the Fed’s decision to cut the rate by 0.5%, the ruble appreciated significantly, reducing the risks of financial instability in Russia due to the global negative background. Today’s decision opens up the possibility for the Russian Central Bank to lower the rate at the next meeting by 0.25%. At the same time, there appears a non-zero probability of a rate cut immediately by 0.5% as a reaction of the Central Bank of the Russian Federation to global challenges for the economy.”

“It seems like it’s a weird time to do it, after yesterday’s bounce. It does nothing for the economy, but I think that maybe it helps the markets. From this we can make a promise that we are in control of the situation and, perhaps, everyone should calm down. The risk is that the market will ignore it.”

Peter Kenny, Kenny’s Commentary LLC and Strategic Board Solutions LLC

“The rate cut underscores the scale of the challenge facing the global economy. It inflates the problem that the coronavirus presents to markets.”

“Normally, markets would welcome a rate cut, and they hoped so. Now, after they received it, the question is what will happen next.”

“This is definitely not good for the dollar. The Federal Reserve reduces the cost of financing a short-term position (cost of carry).”

“The question is which countries have opportunities for fiscal incentives, but the United States does not have them in the election year. At the same time, not many central banks can follow the Fed and lower rates.”

Justin Lederer, Cantor Fitzgerald

“I’m a little surprised. I did not expect this at 10 in the morning, I thought to see some kind of coordination between the central banks. The main result is an increase in the steepness of the curve (yield), (spread) 2-year / 10-year (bonds) jumped by almost 7 basis points. This is a big, big increase in steepness … I am surprised that this happened today. I am not surprised that they did so, but I thought it would be more coordinated, and not suddenly at 10 in the morning.”