Even lower for possibly longer
Insights

Even lower for possibly longer

In a rare inter-meeting policy move on 3 March, the Federal Reserve Board Open Market Committee (FOMC) announced a 50 basis point rate cut in the Federal funds rate in an effort to mitigate the economic and market impacts of the novel coronavirus. Based on the Fed funds futures curve, many investors had estimated around three 25 basis point cuts in 2020 prior to the announcement, but the timing of the policy announcement caught the market by surprise.

Speaking after the meeting, Fed Chair Jerome Powell stated that the cut would “provide a meaningful boost to the economy … and avoid a tightening of financial conditions”.

Lowering interest rates can be a powerful tool for combating deteriorating financial conditions. Because companies borrow at both floating and fixed rates, a reduction in borrowing costs can provide meaningful support for wages and employment, as well as for a company’s spending plans, if the economy slows down as now anticipated. For consumers, lower borrowing rates can be an incentive to refinance mortgages and lower their total debt expense, which can put real money in their pockets.

Historically, yields on US government bonds have directionally tracked the Fed funds rate (many factors move yields) and since news of the coronavirus broke in January, yields on government bonds at all maturities have moved significantly lower. The yield on the 10-year US Treasury reached an all-time low on 9 March and certain yield curve pairs are now inverted, indicating that the market expects further easing and a return to a zero percent Fed funds rate.

So, where do we go from here? In our view, odds are rising that the Fed will have to ease again to offset a further tightening in global financial conditions. Historically, every time the FOMC has lowered rates between scheduled meetings, it lowered rates again at the regularly scheduled meeting that followed.

This would suggest that Fed funds will move another 25-50 basis points lower in a couple of weeks. A zero percent Fed funds rate makes the risk/reward in the front end of the yield curve less attractive, and once the rate hits zero we would expect the Fed’s next move (if the markets do not begin to show improvement) would be unconventional measures, such as asset purchases.

Figure 1: US Fed funds rate and yields

Federal funds effective rate

Source: Macrobond and Columbia Threadneedle Investments. The effective Federal funds rate is a volume-weighted median of overnight Federal funds transactions, published daily by the New York Fed.

In our view, a sustainable move higher in US yields will require a combination of data that indicate limited economic damage from the virus and aggressive fiscal stimulus in conjunction with rate cuts. There are limits to what central banks can do, and the market is looking for, and responding to, policy responses by governments as well as central banks.

20 March 2020
Gene Tannuzzo
Gene Tannuzzo
Global Head of Fixed Income
Share article
Share on linkedin
Share on email
Key topics
Related topics
Listen on Stitcher badge
Share article
Share on linkedin
Share on email
Key topics
Related topics

PDF

Even lower for possibly longer

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Related Insights

9 July 2024

Laura Reardon

Client Portfolio Manager, Emerging Market Debt

Dispelling the myths around emerging market debt

Emerging markets today bear little resemblance to those rocked by financial crises in the 1980s and 1990s, with the asset class diversified across geography, investment grade, high yield, sovereigns and corporates
Read time - 3 min
9 July 2024

Fixed Income Desk

In Credit - Weekly Snapshot

In Credit Weekly Snapshot – July 2024

Our fixed income team provide their weekly snapshot of market events.
Read time - 5 min
8 July 2024

Christopher Hult

Portfolio Manager, Fixed income

Paul Smillie

Senior Credit Analyst, Investment Grade

EMEA Investment grade outlook, H2 2024

Inflation is finally coming down, central banks are poised to cut rates, and credit spreads have withstood volatility in government bonds. So where do we see things going from here?
Read time - 1 min
12 July 2024

Tochi Nwozuzu

Content Marketing Executive

Market Monitor – 12 July 2024

Global stock markets made further gains this week after weaker economic data in the United States raised the likelihood of an interest rates cut later in the summer.
Read time - 3 min
11 July 2024

Steven Bell

Chief Economist, EMEA

Life under Labour: what is the macro background for the new Government, their likely budget plans and the impact on the economy?

After inheriting a dire fiscal position how will Labour deliver economic growth? We take a closer look at their options and plans.
Read time - 4 min
9 July 2024

Laura Reardon

Client Portfolio Manager, Emerging Market Debt

Dispelling the myths around emerging market debt

Emerging markets today bear little resemblance to those rocked by financial crises in the 1980s and 1990s, with the asset class diversified across geography, investment grade, high yield, sovereigns and corporates
Read time - 3 min
true
true

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Investment Strategies

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.

Thank you. You can now visit your preference centre to choose which insights you would like to receive by email.

To view and control which insights you receive from us by email, please visit your preference centre.

Woman listens to music through headphones
Play Video

CT Property Trust- Fund Manager Update

Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque laudantium