Bets on big Fed rate cuts rise as virus spreads, ECB vows action

[BENGALURU] Traders on Monday piled into bets the US Federal Reserve will deliver a big dose of stimulus starting this month amid mounting concern over the economic impact from the coronavirus and indications that global central banks are readying a monetary rescue.

Pricing in futures tied to the Fed's policy support a 100 per cent chance of a half percentage-point rate cut at the Fed's March meeting, and another half a percentage point-cut by July.

The bets reflect rising global expectations that global central banks will take coordinated action to fend off the worst effects of a world economic slowdown as factories and schools close and public events are cancelled in efforts to slow the virus' spread.

They follow a pledge by Fed Chair Jerome Powell on Friday to "act as appropriate" to support the economy; one by Bank of Japan Governor Haruhiko Kuroda on Monday that he would "strive to stabilise" markets roiled by virus fears; and one from European Central Bank President Christine Lagarde late on Monday that the bank would "stand ready to take appropriate and targeted measures" to address risks.

US President Donald Trump on Monday also renewed his call for the Fed to lower interest rates, tweeting that the central bank has been "slow to act."

Finance ministers of seven big economies, and their central bankers, will meet by conference call on Tuesday to discuss possible coordinated action.

There are doubts about how effective such action could be. That is partly because of the nature of the threat: Central bank and fiscal policy can boost demand by lowering the cost of borrowing and putting money in people's wallets. But they cannot repair disrupted global supply chains or convince people to fly, attend meetings or even go to school, especially if local governments or companies bar such activities.

The challenge for monetary policy also comes from the fact that interest rates globally are already at low levels. The European Central Bank and the Bank of Japan, which have pushed interest rates below zero, may be particularly challenged to find ways to cushion their economies from the effects of the coronavirus.

REUTERS