US: Fed is set to ease in March – Nordea

Late Friday night, Fed Chair Powell responded to the substantial market sell-off in an extraordinary statement. The question is no longer whether the Fed will ease, but when and by how much. Analysts at Nordea expect an easing package in March.

“The equity sell-off prompted a response from Chair Powell who in a statement late Friday night said that ‘The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy’.”

“The Fed should deliver some easing in March. We think an easing package consisting of a 25 bp rate cut, strong easing forward guidance as well as a postponement of the otherwise announced liquidity tapering is on the cards. We see the risk as clearly tilted towards a bigger rate cut of 50 bp in March. If equities tank even more ahead of the FOMC March meeting, we would thus expect a 50 bp cut to materialise.”

“The uncertainty around our forecast is high. On one hand, a rate cut of 50 bp in March followed by more cuts in the coming months cannot be ruled out if this turns out to be a US or even a global recession. On the other hand, Fed may opt for only one rate cut in March, if the coronavirus is soon contained and macro indicators suggest a V-shaped recovery.”

“Lastly, bear in mind that we do not see the upcoming US Presidential election as a real barrier for a rate cut.”