The Federal Reserve's decision to cut interest rates by half a percentage point outside of a scheduled meeting -- the first time it's made such a move since the 2008 financial crisis --was aimed at easing financial conditions and restoring confidence as the coronavirus outbreak spreads globally. Investors weren't impressed.
The S&P 500 closed down 2.8%, while the Dow shed 786 points, or 2.9%. The yield on benchmark 10-year US Treasury notes fell below 1% for the first time in history as investors rushed into safe haven assets. Those are big slides on a day that was meant to be about reassurance.
What happened: Traders saw the move and wondered if the Fed knew something that everyone else didn't. Instead of assuaging fears about how the virus would hit economic growth, it amplified them.
"Confidence matters in volatile times. It would have been better for the Fed to cut by 25 [basis points] and let markets hope for more," Holger Schmieding, chief economist at Berenberg Bank, told clients on Wednesday.
Some observers are also concerned that the Fed is prematurely running down its already depleted arsenal. The central bank could still cut interest rates four times, assuming each cut is a more standard 25 basis points, before reaching zero. But it has far less powder than investors would generally like to see in uncertain times.
Other central banks are in even worse positions. The European Central Bank and the Bank of Japan, for example, have already pushed their benchmark interest rates into negative territory.
Central banks can still help: Satyam Panday, senior US economist at S&P Global Ratings, points out that while interest rate cuts don't directly address some of the problems caused by the coronavirus, such as snarled supply chains, they could still prove useful.
The cuts could "offset some of the tightening that has occurred in financial markets" and keep credit flowing, while helping to speed up an economic recovery in the second half of the year, he said.
Yet in the near term, investors aren't satisfied, with markets now clamoring for the Fed to cut rates again at its scheduled meeting later this month.
"The Fed seems committed to frontloading cuts, acting aggressively and forcefully," Michelle Meyer, Bank of America's chief US economist, told clients Tuesday. "The market is also pressuring the Fed by pricing in over a 70% probability of a March cut; the Fed won't fight it."
