According to UOB Group’s Senior Economist Alvin Liew and Rates Strategist Victor Yong, the Federal Reserve could reduce further its FFTR at the next meeting on March 17-18.

Key Quotes

“Post-G7 finance ministers & central bankers’ tele-conference on Tuesday (3 Mar), the US Federal Reserve Chair Jerome Powell “walked the talk” of using all appropriate policy tools and announced a 50bps emergency Fed rate cut to bring the Fed Funds Target rate (FFTR) range to 1.00-1.25%.”

“The surprise and unanimous Fed decision was meant to address the uncertainty surrounding the coronavirus outbreak (COVID-19) and the Fed judged the outbreak will weigh on the economy for some time but the economic impact remains uncertain. It is also unclear how long the outbreak will last, even though Powell still expects US to return to solid growth.”

“Following the surprise move, we now expect the Fed to implement another 50bps rate cut in the March FOMC, to bring the FFTR range down to 0.50-0.75% for the remainder of 2020, as another insurance cut in view of the rising risks to the US outlook from the COVID-19 outbreak. Note that there is a non-negligible risk that the Fed could slash by an even bigger 75bps. While we have not priced in further rate cuts beyond 1Q, the Fed still has room for at least one or two more 25 rate cuts if the risk factors escalate and more accommodation is needed to safe-guard the economy. That said, we do not think the Fed will want to push rates beyond zero, into negative territory.”

“With the change in our Fed funds forecasts, by end 2020, our forecasts for 3M US Libors are revised lower to 0.85%, while the projected 10Y UST yield is lowered to 1.60%.”

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