In a surprise move, the Federal Reserve slashed interest rates by half a percent on Tuesday, citing risks to the economy from the coronavirus. Investors, spooked by the surprise move, pushed the 10-year Treasury yield below 1% for the first time ever.
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent,” the Fed state in a written statement.
The Fed added that it is “closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”
The rate cut came two weeks ahead of the Fed’s scheduled March 18 meeting, which is when the rate cut was expected to happen. But with the coronavirus quickly spreading globally, the Fed presumably saw no reason to wait, and by cutting now the central bank hopes to send the message that it is ready to support the economy and markets in any way that it can.
Based on the initial reaction in markets to the Fed rate cut, investors are not getting that message. The SPDR S&P 500 ETF Trust (SPY) was last trading down by 2.7%, though that comes on the heels of a 4.3% surge on Monday.
There is debate about what the Fed move means for markets going forward. Skeptics argue that the Fed has no power to slow down the coronavirus, and that by cutting now, the central bank is only adding to the panic in the markets. Others say that the central bank could still offset some of the virus' economic impact, and that it is better for the Fed to be proactive than reactive.
Some of the more beaten down areas of the market were faring a little better than the broader market on Tuesday. The US Global Jets ETF (JETS), which tracks the airline industry, sagged 1%, adding to the 20% decline the ETF saw in February.
Meanwhile, emerging market equities were holding up relatively well. The Vanguard FTSE Emerging Markets ETF (VWO) shed only 0.3%. Losses in the U.S. dollar, which fell to its lowest level since the first week of the year, provided some support to EM equities.
Gold was another asset to benefit from the dollar’s retreat. Prices topped $1,640, sending the SPDR Gold Trust (GLD) up by 3.7% on the session.
Bond Yields Hit Session Lows
On the rates front, 10-year Treasury yields hit session lows in the hours following the Fed’s announcement. The benchmark yield dipped below 1%, a fresh all-time low.
The 30-year Treasury yield touched 1.61%, not far from Monday’s all-time low of 1.58%.
For the year, TLT is up 15%, while IEF is up 8%.
Interestingly, the 10-year Treasury bond yield is hovering just below the federal funds rate range (1%-1.25%), while the 2-year Treasury yield at 0.72% is well below the range, suggesting that more rate cuts may be forthcoming.