Fed Watch: Maximum Overdrive

kevin-temp2
Head of Fixed Income Strategy
Follow Kevin Flanagan
03/04/2020

Well, the Federal Reserve (Fed) delivered a 50 basis points (bps) cut in the Federal Funds Rate yesterday in an inter-meeting move, the first such action since the 2008 financial crisis. This brings the new target range down to 1%–1.25%. The key questions are: Why the emergency move, and will it really move the needle?

First, why? Obviously, the Fed felt the need to act now instead of waiting to see how the economy will respond to a potentially worsening scenario from the COVID-19 virus. The U.S. economy was in solid shape to begin with, a fact the Fed acknowledged as well, so that’s the good news. Growth will more than likely take a hit, but in our base case scenario, we still see any potential negative impact as being transitory.

One could certainly make the case that the Fed was reacting to the financial markets. A “market-led Fed” is usually not the preferred course of action for monetary policy. Did the Fed panic? I don’t want to be too harsh in my assessment, but sometimes perceptions beat reality. The initial responses seem to underscore the markets’ insatiable appetite for more. The verdict will be out on this for a while.

Obviously, rate cuts tend to be growth supportive, but this is not your typical economic scenario. We could argue all day as to whether this development will move the needle, so let’s just take this rate cut and put it “in the bank.” In other words, it should help financial conditions and the funding markets. And let’s not forget the recent plunge in Treasury yields. I don’t know how many times I’ve been asked, “Should I refinance my mortgage?” over the last week.

Is there more to come? The Fed seems to be on a mission, so an additional cut would appear to be on the table, depending how developments play out.

As the guy on the New Jersey boardwalk used to say: Keep your hands and feet inside the vehicle at all times.

 

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About the Contributor
kevin-temp2
Head of Fixed Income Strategy
Follow Kevin Flanagan
As part of WisdomTree’s Investment Strategy group, Kevin serves as Head of Fixed Income Strategy. In this role, he contributes to the asset allocation team, writes fixed income-related content and travels with the sales team, conducting client-facing meetings and providing expertise on WisdomTree’s existing and future bond ETFs. In addition, Kevin works closely with the fixed income team. Prior to joining WisdomTree, Kevin spent 30 years at Morgan Stanley, where he was most recently a Managing Director. He was responsible for tactical and strategic recommendations and created asset allocation models for fixed income securities. He was a contributor to the Morgan Stanley Wealth Management Global Investment Committee, primary author of Morgan Stanley Wealth Management’s monthly and weekly fixed income publications, and collaborated with the firm’s Research and Consulting Group Divisions to build ETF and fund manager asset allocation models. Kevin has an MBA from Pace University’s Lubin Graduate School of Business, and a B.S in Finance from Fairfield University.