JAKARTA (TheInsiderStories) – The United States’ Federal Reserve (Fed) announced a half-point cut in the target for the federal funds rate, to a range of 1 – 1.25 percent. The situation surrounding COVID-19 is continuing to evolve rapidly, with difficult-to ascertain economic impacts, so the outlook for interest rates is also more uncertain.
According to Ken Matheny, Senior Economist, IHS Markit, its likely that additional monetary stimulus will be forthcoming in the form of further reductions in interest rates by the Fed. He stated, “Last week we had expected an aggressive Fed response based on the burgeoning risks to the outlook emanating from the coronavirus outbreak, so today’ announcement was not unexpected.”
By acting quickly and aggressively, the chairman, Jerome Powell, implicitly signaled a high degree of concern about risks to the outlook, and that the Fed is prepared to provide additional accommodation, if appropriate.
Given the ongoing tightening of financial conditions — in the US, broad equity indices did rise on the Fed’s announcement but then declined anew, while risks spreads have widened over the past few weeks — additional Fed rate-cutting is likely.
“We expect the FOMC will consider a rate cut at either the upcoming meeting on 18 March or at the subsequent meeting on 29 April. The timing and magnitude of additional actions is highly dependent on subsequent developments, including developments in financial markets, he adds.
In their latest meeting, Federal Open Market Committee (FOMC) said, the fundamentals of the United States (US) economy remain strong, however, the coronavirus poses evolving risks to economic activity.
In the coming weeks, the committee stated is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy. Standard & Poor’s expected US GDP growth in the first quarter would be closer to 1 percent than its pre-virus forecast of 2.2 percent.
The chief economist Beth Ann Bovina also sees second-quarter growth would also closer to 1 percent. The hit to US growth would come through five main channels like travel and tourism, weaker demand from China and rest of the world, disruptions to supply chains, reduced private spending and lower commodity prices. China is the US’ third-largest trading partner, making up 13.5 percent of total trade with the country.
Today, Bank of Canada will have its interest-rate meeting, with expectations of it following the Fed growing.TD Securities expects a cut of 25 basis points to 1.5 percent from earlier at 1.75 percent.
In Asia, the Hong Kong Monetary Authority also lowered its base rate through the overnight discount window by 50 basis points to 1.5 percent on Wednesday, hours after the FOMC delivered a rate cut.
Bank of Japan (BoJ) could ramp up stimulus as part of efforts by central banks to prevent the coronavirus outbreak from triggering a global recession in this month. The Fed decision to cut interest rates adds pressure on the Japanese central bank to follow in its footsteps.
The BoJ could take its -0.1 percent short-term rate target deeper into negative territory. This will also become a strong option if the Group of seven statement calls on central banks to jointly cut rates.
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