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Fed reacts to concerns from the coronavirus

March 03, 2020

This morning, the Federal Reserve cut the federal funds rate (its short-term policy rate) by a half percentage point. Although the exact date was unknown, Nationwide Economics expected a 50 bps rate cut before the FOMC meeting on March 17-18 in response to the increasing threat to the economy and financial market conditions presented by the coronavirus COVID-19. The Fed’s language announcing the cut suggests that it could cut by another 25 bps (or even 50 bps) by the June FOMC meeting, but this will depend upon how the economy and financial markets move over the next few months – which will be strongly influenced by how the COVID-19 virus develops. This is a very fluid situation.

We still don’t expect a recession in 2020, but a period of very slow growth in the middle of the year, instead – with a pickup in the economy by the fourth quarter. If this is correct, the yield on the 10-year Treasury note should rise later this year, although remaining below the level at the start of 2020.