In an emergency move Sunday afternoon, the U.S. Federal Reserve announced it is dropping its benchmark interest rate by a full percentage point to near zero – the first time interest rates have been this low since the 2008 financial crisis – and launching a plan to purchase at least $700 billion worth of Treasury bonds and mortgage-backed securities.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing,” the Fed said in a statement.
“Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.”
The central bank also said it struck a deal with five other foreign central banks including the Bank of Canada, the Bank of England and the European Central Bank to lower their rates on cross-currency swaps as a way to improve liquidity conditions in U.S. and foreign financial markets.
Is It Enough?
Goldman Sachs (GS) on Sunday cut its outlook for the U.S. economy in the first two quarters of FY2020 saying they expect economic activity to “contract sharply in the remainder of March and throughout April.” The firm also said it sees the S&P 500 likely heading back down to the 2,450 level. That’s 4.1% lower than the index’s current level.
Futures Price Action
As of writing, S&P 500 traded 4.8% lower at 2,555. Dow Jones is 1,041 points lower at 21,798 (Dow’s implied open is red 1,200 points). Nasdaq lost 3.44% at 7,541. Other market considerations include trading action in Treasuries and oil prices. The benchmark 10-yr yield is down 19 basis points to 0.76%, and WTI crude is lower by $1.76, or 5.54%, to $29.97 per barrel.