Markets Point Toward Coronavirus Rate Cuts

The Federal Reserve may be forced to move quickly in reaction to the spreading outbreak of the coronavirus, market indicators suggested Monday.

Stocks plunged on Monday, pushing the Dow Jones Industrial average down by over 900 points on the open, and bonds rallied, pushing yields down to new lows. The 30-year Treasury yield fell to 1.81 percent, a new all-time record low.

The yield curve between 10-year Treasuries and 2-year Treasuries flattened further, with the longer dated bonds yielding just 11-basis points above the shorter. The three-month Treasury rate is significantly above both, an inversion in the yield curve that in the past has been a recession indicator.

A flattening or inverted yield curve can indicate that investors expect interest rates to decline in the future, typically because the Fed reduces rates to ward off an economic slump.

The Fed Funds futures market, where investors can bet on changes in monetary policy, moved decisively on Monday to indicate rate cuts coming sooner and more frequently than previously thought, according to the CME Group’s Fedwatch tool. The odds of a rate cut at the upcoming March meeting essentially doubled, from 11 percent to 23 percent. Many investors seem to believe, however, that the Fed will not react that quickly and will hold rates steady until more data about the economic costs of the contagion come in.

The futures market now indicates a 54.5 percent chance of a rate cut at the April meeting, up dramatically from less than a 30 percent chance a week ago. Even as late as Friday, the odds stood at just 39.7 percent. The odds of at least one cut by the June meeting are now at 75 percent, up from 46 percent a week ago.

Going out to the September meeting, the futures now forecast a 58.6 percent chance of a second rate cut and just a 10 percent chance that rates will remain unchanged. There’s around a 25 percent chance implied by the futures market that we’ll see the third rate cut at that meeting.