A 50 bps rate cut by the Fed is now fully priced in, will Powell & co. deliver?
The Fed has the propensity to get bullied by the market
That has been the case since they began tightening policy again back in December 2015 and their latest move this week continues to signal that the market can continue to bully them into a decision and get away with it.
But if there is ever a time for the Fed to put their foot down, now is probably it. However, they risk the market kicking and screaming - even more so than it has in the past week.
Fed funds futures have now fully priced in a 50 bps rate cut (and then some) as we look towards the 18 March policy meeting decision.
Even if monetary policy may not be effective in fighting back against the virus fallout, I'm sure the market knows that the threshold for the Fed to cut will be much lower than trying to raise rates once again once the virus saga is over and done with.
As such, that will fuel another massive rally in Wall Street when the time comes with rates stuck at the lower-bound. Investors have made that clear in their reaction last week, the only thing that matters is the stock market. And why shouldn't they not react that way?
The Fed has been spoon-feeding the market for so many years now and investors know they can keep getting what they want at the end of the day.
In a sensitive time like this, I doubt the Fed will consider going against market expectations.
As much as we like to believe central banks are independent and that they put policy thinking and the economy first, the number one rule has been to not upset the market.