Fed surprises but is the 50 bp cut too early?

Did the Fed just cut interest rates because of the economic impact of the coronavirus or because of the recent slump in equity prices? Whatever the reason, supporters of Trump will claim that his renewed criticism of the Fed has done the trick. But make no mistake about it, the President will continue to call for zero interest rates despite the bigger than usual 0.5% trim. However, with just another 1% of room left before zero, the Fed has little room for manoeuvre should the economy deteriorate sharply now as a result of the virus spread or other factors. So, it remains to be seen how much of an impact this will have on the markets in the long term. Some investors will no doubt be wondering whether the Fed has moved too soon. For now, though, the surprise 50-basis point rate cut has done the trick. The US dollar has slumped, leading to a sizeable bounce for buck-denominated gold, while equities have extended their gains after yesterday’s sharp rebound. Still, the immediate reaction has not been too great and that will disappoint the Fed – and Trump.