Federal Reserve Shock Markets With Emergency Interest Rate Cut
For the first time since October 2008, the Federal Reserve has held an emergency meeting and opted to reduce interest rates by 50-basis points. This lowers the US interest rate corridor to 1% – 1.25%. The move comes as global financial conditions tighten while the number infected by Coronavirus is expected to dramatically increase.
Even though many banks and institutions forecast the Federal Reserve to take such action, the move still managed to take many participants by surprise. Bear in mind, the Fed’s unanimous message only a few days back was that they do not see any material cause for concern and that the US economy was strong. The notion that it’s better to be early than late when it comes to addressing concern in financial markets might explain the quick shift in central bank sentiment.
The greenback weakened as a result of the reduction in interest rates. Although, some may have expected a larger reaction in the currency markets. GBPUSD gained 0.25% while the euro managed to advance by 0.40% against the buck. Stock markets initially surged but had given all the gains back within a couple of hours and ended lower on the day. Unquestionably, the copious amounts of stimulus which have been ploughed at financial markets over the last decade have made them desensitised to any new attempts.
Today may see the Bank of Canada follow in the Fed’s footsteps by lowering rates themselves. We’ll find out at 3 pm! Elsewhere, UK services PMI data for February will be released at 0930. From the US, ADP non-farm employment change as well ISM non-manufacturing data are scheduled for this afternoon. Many participants will also be paying close attention to the continued response of markets to the surprise and significant policy move from the Fed yesterday.
Written by Viv Savani. 8:46am, March 4th 2020
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