US bank lobby economist predicts global rate cut coming

Tuesday, 3 March 2020 00:00 - - {{hitsCtrl.values.hits}}

WASHINGTON (Reuters): Investors battered by the breathtaking drop in global stock markets on coronavirus fears are ever more convinced the world’s big central banks, including the Federal Reserve, will soon step in to try to quell the storm.

Against that, the top economist for the US bank lobby - a former Fed insider - issued a remarkably specific prediction on Sunday that the rescue is nigh.

In a blog titled ‘Don’t keep your powder dry’ here, Bill Nelson, chief economist at the Bank Policy Institute who worked on the Fed’s responses to the 2007-2008 financial crisis, predicted: A coordinated global interest rate cut by the top central banks, such as the one executed at the height of the crisis in October 2008 by the Fed and five other central banks. They will possibly include in this action the People’s Bank of China and the Hong Kong Monetary Authority, the two banks whose economies have so far suffered most from the outbreak.

It will happen tomorrow, March 4. Nelson noted that the previous big coordinated actions in December 2007, October 2008 and November 2011 all occurred on a Wednesday.

It will happen before the US stock market opens, either 7 a.m. or 8 a.m. ET (1200 or 1300 GMT).

It will be big: half a percentage point at least. The Fed’s current benchmark lending rate is set in a range of 1.50-1.75%, and rate futures markets are pricing in a cut of at least a quarter percentage point at the Fed’s next scheduled meeting 17-18 March. “The only way to get a positive market reaction is to deliver more than expected,” he wrote.

It will include “forward guidance” - a Central Bank term for some form of pledge regarding future policy action. Nelson said he would not be surprised to see something aimed at preventing a further erosion of inflation, something the Fed and other central banks have been battling for most of the past decade. His suggestion: The Fed pledges not to raise rates or take other policy tightening actions until its preferred measure of inflation is above its formal target of 2% for six months.

Alongside his predictions for a globally coordinated move - something many investors and economists worry could well fall short of what’s needed because of depleted tool kits at the world’s big central banks - Nelson in a related post here said the Fed could loosen a number of requirements and other regulations on US banks to help keep credit moving.

Regarding the rate cut, however, Nelson does offer one big caveat: “If markets are calm Monday and Tuesday, I’m not sure what will happen.”