Economists ar Goldman Sachs have predicted that the U.S. Federal Reserve is likely to cut interest rates before its next scheduled meeting in two weeks time, citing an unscheduled statement from the head of the U.S. central bank on Friday.
Their forecast joins a growing chorus of voices who are predicting a globally coordinated rate cut among the world’s biggest central banks.
Stock markets have sunk for the seventh straight day on worries that an outbreak of China’s coronavirus will hurt the global economy, with Federal Reserve Chairman Jerome Powell saying on Friday afternoon that the Fed is “closely monitoring” developments and “will use [its] tools and act as appropriate to support the economy.”
In a note, Goldman Sachs economists Daan Struyven and Jan Hatzius said, this “strongly hints at a rate cut at or even before the March 17-18 FOMC (Federal Open Market Committee) meeting.”
Last Week, Goldman had already increased its forecast for the Fed easing interest rates in response to the coronavirus outbreak, and later revised it up a notch in its forecast on Sunday, which came out shortly before financial futures markets resumed trading for the week ahead.
U.S. equity index futures were down by 1.3% and Treasury futures were higher as investors sought safety in government bonds.
Goldman expects a cut of at least half a percentage point by March 18. It has also forecast an additional cut of half percentage point during the second quarter, for a total reduction of 1 percentage point from the Fed’s current target range of 1.50-1.75%.
Goldman Sachs does not expect the Fed to act in a vacuum.
“Specifically, we see a high risk that the easing we expect over the next several weeks occurs in coordinated fashion, perhaps as early as the coming week,” said both economists from Goldman. “Chair Powell’s statement on Friday suggests to us that global central bankers are intensely focused on the downside risks from the virus. We suspect that they view the impact of a coordinated move on confidence as greater than the sum of the impacts of each individual move.”
Goldman also said, it agrees with commentators point of view that central banks are not well equipped to combat the effect a global health crisis will have on the economy.
“Central bankers will still want to do their part to support the economy, especially at a time when few of them worry about inflation rising too much,” wrote Goldman in a note. “This implies that if the news on the virus and the economy remains negative in the near term, central banks may well react aggressively even if the impact on economic growth is limited.”