Fed rate cut soothes, then spooks virus-weary investors

By Rodrigo Campos

NEW YORK (Reuters) – Investors had mixed reactions to Tuesday’s surprise 50 basis-point rate cut from the Federal Reserve, helping fuel a day of swings in stocks and other assets.

The U.S. central bank cut interest rates in a bid to shield the economy from the impact of the spreading coronavirus, and Fed Chair Jerome Powell suggested that the threat to the economy would not soon abate.

While lower rates may stoke risk appetite and offer support to asset prices, some saw the Fed’s move as a signal that the accelerating coronavirus outbreak may deal a larger-than-anticipated blow to the U.S. economy.

“The rate cut underscores the magnitude of the problem that the global economy is facing,” said Peter Kenny, founder at Strategic Board Solutions LLC in New York. “Normally, markets would welcome a rate cut, and they were hoping for it. Now that we’ve got it, the question is what’s next.”

The S&P 500 reversed losses and rose by as much as 1.5% after the move was announced Tuesday morning, before dropping back into the red. The index was recently down 2.7%.

The dollar, which becomes less attractive to yield-seeking investors when rates fall, was off 0.4% and yields on the 10-year U.S. Treasury note () hit a fresh low below 1%.

The Fed’s move, in theory, makes it cheaper to access loans that could help companies during economically uncertain times and buoy consumer spending. Lower rates also make it cheaper for market participants to borrow money for purchasing stocks and other assets.

At the same time, lower rates would do little to allay the concerns of travelers who are reluctant to book trips in the midst of a global outbreak, or boost economic activity in areas experiencing the kind of restrictions that shut down parts of China’s economy last month.

“If consumers slow down you’re going to see some small business owners get into trouble. This can help and this is what the Fed can offer,” said Quincy Krosby, chief market strategist at Prudential Financial (NYSE:) in Newark, New Jersey.

However, with the containment of the virus nowhere in sight, “the stock market has not discounted the possibility that the U.S. economy would stall to a lockdown,” said Krosby.

The Fed’s move was the first unscheduled rate cut since October 2008, when the central bank reacted to a contraction in the economy that had begun the previous year.

Similar moves from the Fed have tended to occur during moments of market stress, and have not always buoyed stock markets over the longer term.

On average, the S&P has fallen 5.26% in the two weeks prior to non-scheduled cuts, according to data from Bespoke Investment Group. In the year after a non-scheduled cut, the index has averaged a decline of 8.87% with gains in just two out of seven instances.

Some market participants had been anticipating a move from the Fed. The surged over 5% on Monday while the S&P 500 and Nasdaq each jumped more than 4% in a major rebound sparked partly by expectations of coordinated action from the world’s central banks.

“I think it spooked investors after the strong rebound, because it was made right away and it was 50 basis points. So it was larger than people (were expecting), and some may be thinking, ‘Ooh, are things worse than we think?'” said Alan Lancz, president at Alan B. Lancz & Associates in Toledo, Ohio.

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