Investors hope Fed can help calm markets as big rate cut expected

NEW YORK (Reuters) – Interest rate cuts won’t cure the coronavirus but investors are still hoping the Federal Reserve can take some actions to help soothe the roiled stock market.

Only days after a rare emergency rate cut, the Fed is expected at its regularly scheduled meeting next Wednesday to slash its target rate another 75 to 100 basis points to near zero, according to the CME FedWatch website.

The U.S. central bank also may announce measures to ensure sufficient liquidity and lending or to purchase assets by restarting the quantitative easing that the Fed employed during the financial crisis.

A move like that could offer some comfort to investors after Thursday’s bruising decline, in which the Dow Jones Industrial Average notched its biggest one-day drop since 1987.

“If the market feels the Fed is responding appropriately and is helping investors and consumers, and feel like somebody is in charge, maybe that can help settle things down,” said Willie Delwiche, investment strategist at Baird in Milwaukee.

Indeed, stocks briefly pared losses on Thursday after the New York Fed said on it will introduce $1.5 trillion in new repo operations this week and start purchasing a range of maturities as part of its monthly Treasury purchases. But the rebound was short lived and the S&P 500 ended down 9.5% on the day.

Expectations for a more significant rate cut have increased this week as the market decline deepened over fears about the economic fallout of the coronavirus crisis. As of Thursday, the S&P 500 had fallen more than 26% from its Feb. 19 record closing high, including a drop of more than 16% so far for the week.

Traders currently expect the Fed to cut its target rate from its current range of 1-1.25% to as low as 0-0.25%. Some market watchers wonder if the central bank could even eventually go into negative territory.

“Central banks must bolster confidence that they are willing to test the limits of where they view the effective bound on rates,” JPMorgan Chase economists said in a note this week.

Markets will respond “poorly” should the Fed fail to cut rates, said Nela Richardson, investment strategist at Edward Jones, but added that “the risk of aggressive action now is that you sacrifice valuable ammunition in the short term to boost short-term market sentiment.”

“You might need the ammunition further down the road if unemployment increases or deflation starts,” Richardson said.

Of course, rate cuts may not help equities. The S&P 500 ended up falling 2.8% on March 3 despite the Fed’s surprise half-percentage point cut, which boosted sentiment but also led investors to speculate on what other actions the Fed could take.

Boston Fed President Eric Rosengren said last week that the central bank needed “to think broadly about what tools we would use” if the virus continues to weigh, and that it “could be important” to let the Fed buy assets other than U.S. Treasury and mortgage-backed securities.

Such asset purchases aimed at stimulating the economy, known as quantitative easing (QE), were a key tool used by the Fed to emerge from the 2007-2009 financial crisis.

“Should the Fed gauge that reducing rates is not providing for easier financial conditions, we expect it to quickly turn to quantitative easing,” Morgan Stanley economists said in a note.

Whatever actions the Fed takes, some investors said they are ultimately secondary to the responses of the world’s governments.

In the United States, partisan gridlock threatens to derail the government’s ability to contain the economic damage. Democrats in the House of Representatives have unveiled a plan that would expand programs including food assistance and unemployment aid. The Republican-led Senate will delay its recess to work next week on its own legislation.

“While we think central bank policy is important, we think the fiscal is much more important at this stage,” said Eric Freedman, chief investment officer at U.S. Bank Wealth Management.

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