- Wall Street is increasingly expecting the Federal Reserve to slash borrowing costs to zero amid the coronavirus outbreak.
- Interest rates futures traders are pricing in a roughly 51% probability that interest rates will hit the zero lower bound by April.
- The sharp rise in rate cut expectations came as COVID-19 sparked fears about a potential downturn in the largest economy.
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As the coronavirus outbreak raises alarm about the US economy, Wall Street is increasingly expecting the Federal Reserve to slash borrowing costs to zero.
Interest rates futures traders are pricing in a roughly 51% probability that interest rates will hit the zero lower bound by April, the closely-monitored FedWatch tool from CME Group indicated early Monday.
The sharp rise in rate cut expectations came as the respiratory illness COVID-19 began to spread throughout the US, prompting forecasters to factor in the potential for a downturn in the largest economy.
Following an emergency US rate cut last week, CME Group noted the tool may not fully reflect the latest market conditions. The policy-setting Federal Open Market Committee unexpectedly lowered interest rates by 50 basis points to a range of 1% and 1.5% on Tuesday, the deepest one-time cut in the US since the financial crisis a decade ago.
"Calculations are based on scenarios that most commonly occur at scheduled FOMC meetings," the group said. "The tool is expected to revert to typical results after the March 18 FOMC meeting."
But rate cuts in the US and elsewhere, along with a wave of pledges to combat COVID-19 through fiscal policy, have failed to satisfy financial markets. On Monday, Goldman Sachs forecast interest rates would hit record lows this spring but added that monetary policy would not be particularly effective in the face of the outbreak.
"Not only are lower borrowing costs unlikely to induce spending by people who are afraid of face-to-face interactions, but in addition, many central banks are already close to the effective lower bound on interest rates," said Jan Hatzius, the bank's chief economist, in a note to clients. "Nevertheless, monetary policymakers will want to do what they can."
