Will The Federal Reserve Cut Interest Rates Below 0% This Week?
The Federal Open Market Committee (FOMC) will be conducting its April meeting this week as the U.S. COVID-19 economic shutdown drags on.
With interest rates already essentially at zero and 11 different emergency lending programs already in place, some traders are growing concerned the Fed may be forced to cut interest rates into negative territory if the economy takes a turn for the worst.
On Friday, former president of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota wrote an op-ed for Bloomberg suggesting the Fed may need to follow the example of a handful of European central banks and continue to cut interest rates into negative territory.
“Terrifyingly high unemployment and potentially rapid disinflation are powerful arguments in favor,” Kocherlakota wrote. “Next week, the Fed should take interest rates at least a quarter percentage point below zero.”
The comments from Kocherlakota are a direct contrast to comments made by current Fed Chair Jerome Powell when the Fed cut its fed funds target rate to a range between 0% and 0.25% back in March.
“We do not see negative policy rates as likely to be an appropriate policy response here in the United States,” Powell said.
Not Out Of The Woods Yet
But while the SPDR S&P 500 ETF Trust (NYSE:SPY) has rallied 9.7% in the past month thanks in large part to Fed rate cuts and stimulus programs, some experts argue conditions in the economy are rapidly deteriorating.
On Monday, billionaire hedge fund manager Jeffrey Gundlach told CNBC he's short the S&P 500 and the Fed’s bond-buying stimulus has simply artificially inflated the value of assets like the iShares IBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD).
“I’m certainly in the camp that we are not out of the woods. I think a retest of the low is very plausible,” Gundlach said.
Bond Investors Skeptical
Despite growing murmurs about negative rates, DataTrek Research co-founder Nicholas Colas said the bond market doesn’t seem to be taking the idea of further rate cuts seriously. Colas said the market is essentially pricing in a 0% chance of further rate cuts or potential rate hikes until at least November 2021.
“Negative rates are not happening in the US, but the fact that Fed Funds Futures expect short rates to remain near zero for 2 years says a lot about what this market thinks is the most likely pace of economic growth,” Colas said.
Since it cut rates to 0%, the Fed has shifted its attention to providing stimulus and liquidity to the economy via lending programs and asset purchases. It’s hard to imagine the Fed will change its strategy without good reason given the positive response from the market up to this point.
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