MNI EXCLUSIVE: Ex-Fed Officials See 50 bps Cut Next Week

--FOMC Also Likely To Add Other Liquidity Tools

By Jean Yung and Pedro Nicolaci da Costa

     WASHINGTON (MNI) - The Federal Reserve will likely cut its policy rate

another half percentage point at next week's meeting and take other measures

aiding liquidity to gird the economy against coronavirus, former officials told

MNI. 

     Rising odds of a serious slowdown argue for strong action by the world's

leading monetary authority, the ex-officials said, and a powerful fiscal

response is still urgently needed.

     Former Atlanta Fed President Dennis Lockhart told MNI Tuesday his base case

is for the second 50bps cut in less than a month, bringing the Fed's target

range to 0.50% to 0.75%. A deeper cut is possible if the Covid-19 crisis

accelerates markedly in the next week, he said. 

     The Fed may also launch tools including swap lines with foreign central

banks, emergency lending facilities or bigger liquidity injections to support

money markets, Lockhart said.  "I don't think developing conditions argue for

holding back," he said. 

     Futures markets are pricing in 75bps of easing by the March 18 FOMC

decision and 100bps by the end of Q2, bringing the policy rate back near zero,

according to MNI's PINCH model. Among the most aggressive predictions on Wall

Street is JP Morgan's, which sees rates slashed to the zero lower bound next

week. 

     "Going all the way to zero next week is possible but I just don't know that

there is a committee consensus at this point to exhaust their rate cut options

and go to unconventional tools right away," Lockhart said. 

     --NON-RATE TOOLS

     Officials won't be shy about further action says Jeff Fuhrer, who recently

stepped down from his role as a Boston Fed economist after a 35-year career at

the regional bank. The Fed did the right thing to cut rates last week in its

first inter-meeting move since the 2008 financial crisis, he said.

     Resurrecting the Term Auction Facility established during the banking

crisis could help the Fed lend to more counterparties against a wider range of

collateral than with open market operations. "They have their eyes open to using

as many tools as they can to help the economy," Fuhrer told MNI.

     Another option suggested by Boston Fed President Eric Rosengren last week

is buying assets other than Treasuries and Agency debt, though that requires

Congressional approval. With markets driving Treasury yields well below the

federal funds rate, the Fed's classic QE strategy may have little impact.

     Lockhart reckons that kind of expanded power isn't likely. "They would

prefer to act without going to Congress for new permissions," he said.  

     --FISCAL RESPONSE NEEDED

     Many central bankers say monetary policy remains a secondary consideration

to fiscal tools in the face of the pandemic.

     Former Fed Board research director David Wilcox told MNI the FOMC will cut

50 bps next week to show policy makers are committed to action, even if interest

rates aren't the best tool in this situation. 

     "The focus needs to be overwhelmingly on the public health response and on

the fiscal policy response," whether that is a payroll tax cut, temporary income

insurance or expanded paid sick leave, Wilcox said. He favors conditioning the

response on automatic triggers and urged "constructive experimentalism" to see

what fixes can be administered quickly and effectively. 

     Roberto Perli, former Fed economist and partner at Cornerstone Macro, said

markets aren't only pricing in the Fed slashing to zero, but also a strong

chance rates remain there for as long as a decade.

     "We have a good chance of becoming Japan," Perli said. "That's the market

view."

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta.ext@marketnews.com

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