Fed will cut rates by 1% in 2020

UNITED STATES (OBSERVATORY NEWS) — In a note released Sunday, Goldman Sachs (NYSE: GS ) bank estimated that the Federal Reserve is likely to join other global central banks to aggressively lower interest rates by response to panic related to coronavirus.

According to Goldman, the Fed should indeed proceed with a rate cut of 0.50% (against 0.25% usually) at its next meeting on March 18 if not earlier. Overall, Goldman expects the Fed to cut rates by 100 basis points this year.

These predictions follow a bank investigation in which respondents “cited the virus as a major headwind, and some analysts have noted that a prolonged epidemic could lead to supply chain disruptions in their industry” said the firm.

“Even compared to some of our new key rate forecasts, we think the risk is down, at least in terms of timing. More specifically, we see a higher risk than the easing that we expect over the next weeks will happen in a coordinated fashion, possibly as early as next week, “said Jan Hatzius, Goldman’s chief economist.

The projection is in line with market expectations, which takes into account rate cuts for a total of 1% by the end of 2020, as shown by the Fed rate barometer .

This is contrary to the official position of the Fed, which has declared that it considers American economic growth to be strong and that policy is in a good position to guard against any slowdown at the national or international level.

However, Fed President Jerome Powell began to soften this position on Friday afternoon with a statement acknowledging that the new coronavirus “poses evolutionary risks” to the economy and that officials “will use the tools and act as it should to support the economy. ”

“President Powell’s statement last Friday suggests that global central bankers are intensely focused on the risks of the virus falling,” Hatzius wrote.

According to Goldman forecasts, the Fed’s cuts should be accompanied by a reduction of 100 basis points from Canada and 50 basis points from the United Kingdom, Australia, New Zealand. , Norway, India and South Korea, as well as a 10 basis point reduction from the European Central Bank and the Swiss National Bank.

Will rate cuts be effective?

Interest rate cuts are generally used to combat demand shocks, by reducing financing costs. However, the first effects of the COVID-19 coronavirus alert indicate an impact on supply chains in China and potentially elsewhere, which considerably reduces the potential positive impact of rate cuts.

“We agree with this point,” wrote Hatzius, “but we think central bankers will always want to do their part to support the economy, especially at a time when few are worried about a inflation is too high. This means that if the news about the virus and the economy remains negative in the short term.


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