Fed rate cut reaction: 'Premature' but Bank of England set to follow lead
Coronavirus concerns
A "bold" but potentially "premature" 50 basis point interest rate cut from the US Federal Reserve should pave the way for other central banks, including the Bank of England (BoE), who investment professionals believe is set to follow suit.
The Fed funds target range was cut to between 1% and 1.25% on Tuesday (3 March) on coronavirus fears, following the stockmarkets' largest weekly fall since the Global Financial Crisis.
As markets fell and economic growth expectations were downgraded, the market had begun to price in a rate cut, but an emergency move in between meetings are "rare", with the last coming in 2008.
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Some believe the move is likely to be premature, while others believe it raises concerns over the Fed's independence, as well as its ability to fight a future recession.
Mike LaBella, head of investment strategy at Legg Mason affiliate QS Investors, noted markets are "still trying to determine the impact of the coronavirus".
"It is unclear if last week's drop was the start of a financial panic or just a legitimate repricing of economic risks which persist," he said.
LaBella added that "monetary policy is an unlikely cure for the coronavirus". While easing will positively impact sentiment, uncertainty and volatility will likely continue until the contagion peaks.
Co-manager on the Liontrust global fixed income team David Roberts agreed, adding "it is nigh on impossible to see how monetary policy can change the course of that impact; perhaps it could lessen it slightly, but change course, no chance".
Roberts continued by saying "aggressive fiscal policy" was needed in order to "create demand now". "If monetary responses reduce the propensity for political/fiscal action, as they have done since 2009, then we may find a recession looming."
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James McCann, senior global economist at Aberdeen Standard Investments, meanwhile, noted that rate cuts in situations like these are "pretty blunt tools", adding: "You would really want it to be combined with governments stepping in to act as well.
"By acting now, the Fed risks giving governments all the excuses they need to sit on their hands."
Chair Jerome Powell said the Fed had been in active discussions with other central banks around the world, and the Reserve Bank of Australia also cut rates yesterday by 25 basis points. The Bank of Japan at the start of the week provided liquidity to ensure market stability.
Roberts noted pressure from President Donald Trump to cut rates, alongside concerns equities had retraced back to October levels "seemed too much for Powell to put up with".
This concerns DWS's US economist Christian Scherrmann, noting he worried "markets are now losing faith in the independence of the Fed as some market participants, and President Trump, pushed hard in such a direction".
Other commentators now believe it is likely other central banks will follow the Fed's suit, led by the BoE, which is expected to cut rates imminently.
Capital Economics thinks UK GDP growth will fall to 0.7% this year as coronavirus cases in the UK rise from 51 now to hundreds or thousands in the coming weeks, prompting the BoE to cut by 25 basis points to 0.5% at its next meeting on 26 March.
Paul Griffiths, CIO of fixed income and multi-asset solutions at First State Investments, meanwhile, said: "The probable loosening of fiscal constraints in the UK is likely to be more effective than rate cuts and we are looking for more clarity on this in next week's Budget."
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