Would An Interest Rate Cut Calm The Stock Market?

U.S. markets roared back Monday from last week’s sell-off. However, the S&P 500 is still down 11.1% overall since Feb. 19, and many experts believe the worst of the coronavirus outbreak that has spooked the market is yet to come.

To Cut Or Not To Cut?

Given last week’s stock market drop was the worst since the financial crisis in 2008, many investors and experts are calling for the Federal Reserve to cut interest rates to help support stocks. President Donald Trump, a long-time critic of Fed policy, reiterated calls for more aggressive rate cuts on Monday.

According to CME Group, the bond market is now pricing in a 100% chance of a 0.25% interest rate cut this month. That percentage is up from just 26.6% only a month ago thanks to the coronavirus outbreak. Looking ahead to the end of the year, the market is now pricing in a 94.4% chance of at least a 0.5% rate cut and a 67.7% chance of at least a 0.75% cut.

On Friday, Fed Chair Jerome Powell said the U.S. economy remains strong, but the Federal Reserve is monitoring the coronavirus situation and will act appropriately to support economic growth.

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” Powell said.

See Also: Comparing COVID-19 To The 2019 US-China Trade War

Be Careful What You Wish For

Investors may be hoping a March rate cut stops the bleeding in the stock market, but Sevens Report’s Tom Essaye said Friday that another rate cut might be a bearish signal for the economy.

“While this is a fairly unique situation that the markets have rarely seen in the past, especially in the age of high-frequency trading houses and 24 hour, instant news sources, if the Fed does indeed cut rates in the coming months as the markets are pricing in, then it will mark the fourth rate cut in this cycle that began last summer, and the economy has gone into a recession within 12-24 months 100% of the time that has occurred,” Essaye said.

Essaye said historically speaking, a fourth Fed rate cut hasn’t done much to improve the situation.

Benzinga’s Take

The Fed previously said it did not foresee any adjustments to its interest rate policy in 2020, but Powell’s latest statement seems to leave the door open for a near-term cut. While lower interest rates are typically good news for stocks in the near-term, investors shouldn’t be surprised if a rate cut triggers a market sell-off in this instance as it signals the coronavirus is creating real economic risks in the Fed’s eyes.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.