Fed slashes benchmark rate to zero

A perspective from E*TRADE Capital Management, LLC 03/15/20

On Sunday, March 15, the Federal Reserve announced its second emergency rate cut in the past two weeks, slashing the benchmark federal funds rate by 1% to a target range of 0–0.25%—the lowest level since December 2015.

The announcement followed the Fed’s surprise 0.5% cut on March 3, and also included plans for a $700 billion “quantitative easing” program, through which the Federal Reserve will pump money into the economy by purchasing billions of dollars of Treasuries and mortgage securities. In a statement following the decision, the Fed said rates would remain near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”1

US fed funds target rate

FactSet Research Systems, March 15, 2020


It’s hard to believe that just over a month ago the central bank seemed content to warm the bench, as the US economy chugged along and the stock market soared to new highs. But as the coronavirus continued to spread (it’s now hit more than 100 countries and the World Health Organization declared it a pandemic) and market volatility reached levels last seen in 2008,2 the Fed was faced with an economic and financial landscape that was dramatically different than the one they were looking at in mid-February.

Supply and demand disruptions

In the early stages of the outbreak, the main concern was supply-side shock. Businesses closed stores and factories while workers were quarantined, curtailing the availability of goods and services. But a demand shock now threatens to drag the global economy into a downward spiral as regions (and even entire countries in Italy’s case) go on lockdown, public events are postponed, and travel grinds to a halt.

Precautions have piled up: Many US cities have banned public gatherings of more than 100 people, Disney closed its theme parks, the NCAA basketball tournament was cancelled, the NBA and NHL suspended their seasons indefinitely, and Coachella, one the largest music festivals in the world, was postponed until October. Meanwhile, schools and universities have asked students to vacate campuses and shifted to online classes, turning college towns into ghost towns.

Markets in turmoil

Things seemed to reach panic levels last week as stocks plunged decisively into bear market territory, with major US indexes off more than 20% from their February highs and posting their biggest losses since 2008. Treasury yields have hovered at record lows as investors seek safety in US government bonds.

Oil price volatility triggered by a Russia–Saudi Arabia price war added fuel to an already raging fire. And on March 12, markets suffered their worst day since 1987, as investors appeared underwhelmed by the slow response from the US government on a fiscal stimulus package.

Looking ahead

While the Fed can’t stop the virus or repair the chinks in the supply chain, it’s demonstrated a willingness to fight with the tools it does have available. This is, after all, the largest cut we’ve seen in more than a decade. In addition to easing the cost of borrowing by reducing interest rates, the Fed announced it will inject $1.5 trillion into financial markets,2 stepping up Treasury purchases and providing liquidity to banks. And although we likely haven’t seen the end of market volatility, investors should bear in mind that, eventually, all shocks run their course.

Here are a few things we’ll be keeping an eye on in the coming weeks:

  • Fiscal stimulus: After the Federal Reserve stepped in twice this month to loosen monetary policy, markets have been looking to the government to provide fiscal stimulus to help soften the blow, especially for hard-hit industries like tourism and hospitality. The White House has indicated it is working on a fiscal stimulus package, but a strong market response is hardly a given, especially if investors deem spending measures to be insufficient.
  • Economic indicators: While recent economic data has been solid—housing sales have been increasing, February jobs growth smashed expectations, and unemployment matched a 50-year low—the full impact of the virus has yet to be seen, and it could take weeks or months before a clearer picture emerges.
  • Corporate guidance: At least 150 publicly traded companies have issued warnings anticipating they won’t meet performance expectations for the first quarter of 2020.3 As Q1 wraps toward the end of March, we may start to have a better idea of just how much the virus has impacted top and bottom lines.

The Fed is next scheduled to meet on April 29. What happens until then is anyone’s guess, but today’s announcement at least offers a sign that actions are being taken to in an effort to offset some of the disruption. 

  1. CNBC, “Federal Reserve cuts rates to zero and launches massive $700 billion quantitative easing program,” March 15, 2020, https://www.cnbc.com/2020/03/15/federal-reserve-cuts-rates-to-zero-and-launches-massive-700-billion-quantitative-easing-program.html
  2. CNN, “Wall Street volatility is here to stay,” March 14, 2020, https://www.cnn.com/2020/03/14/investing/dow-stocks-worst-week-2008/index.html
  3. CNBC, “Coronavirus fallout: At least 150 companies have warned of earnings hit,” March 11, 2020, https://www.cnbc.com/2020/03/11/coronavirus-at-least-150-companies-have-warned-investors.html

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