Impact of Emergency Fed Rate Cuts


S&P 500, Gold, & US Dollar Analysis

  • Fed Emergency Cuts Struggle to Support S&P 500 on Domestic Issues
  • US Dollar Typically Benefits from Fed Emergency Rate Cuts
  • Gold Prices Tends to Outperform in the Longer

Federal Reserve Delivered a Another Surprise Inter-Meeting Rate Cut

Unprecedented actions by the Federal Reserve who delivered a second inter-meeting rate cut in as many weeks, in order to address not only the economic ramifications of the coronavirus pandemic but also the disfunction within the bond market. While markets had expected aggressive action by the Fed the timing of the decision has come as a surprise, given that the Fed were scheduled to announce their decision on Wednesday.

Fed Emergency Cut and QE

  • Fed cut the target range by 100bps to 0-0.25%.
  • QE has been restarted with the Fed scheduled to purchase $500bln of treasuries and $200bln or mortgage backed securities.
  • Primary credit rate lowered by 150bps to 0.25%
  • Reserve requirement ratios cut to 0% (effective from March 26th)
  • Dollar swap lines announced with the price cut by 25bps.

The move by the Federal Reserve will likely encourage more central banks to take further action with other DM central banks potentially utilising more unconventional tools (RBA QE). That said, eyes will also turn towards governments fiscal response in order to calm uncertainty pertaining to the spread of the coronavirus. However, with the number of cases continuing to soar across the globe with many countries closing their borders, it is likely that the situation will get worse before it gets better, as such, the question is more on not if there will be a recession but how severe the recession will be?

Given the rare occurrence of an inter-meeting Fed rate cut, which has now happened for a ninth time (twice in the past two weeks) in the last 25 years, this article looks at the previous impact on the S&P 500, Gold and the US Dollar. Original Article published on March 4th.

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How Past Emergency Fed Rate Cut Have Impacted the Financial Markets

S&P 500 Reaction to Fed Emergency Cut

The S&P 500 had responded positively to an inter-meeting Fed rate cut in the short term on average, before heading lower on the longer term. That said, market events that had been a lot closer to home for the US, such as the tech bubble burst in 2001 and the Lehman Brothers collapse in 2008, an emergency rate cut did little to support the S&P 500, which saw a max drawdown of 12% and 30% in 2001 and 2008 respectively. As such, with the spread of the coronavirus increasing in the US, the S&P 500 is likely to continue to struggle going forward.

Figure 1: Fed Emergency Cuts Struggle to Support S&P 500 on Domestic Issues

US Dollar, Gold Price, S&P 500 Outlook: Impact of Emergency Fed Rate Cuts

*0=Fed Emergency Cut. The first emergency rate cut from the Fed in response to the coronavirus outbreak took place on March 3rd.

US Dollar Reaction to Fed Emergency Cut

Typically, the US Dollar has been supported following inter-meeting Fed rate cuts, given that historically the Federal Reserve tends to lead the rest of the central banks. Alongside this, inter-meeting cuts by the Fed tend to take place during a time of distress within the financial markets and thus the US Dollar finds support as investors make a dash for cash. Notably the US Dollar is the biggest beneficiary when there is a global recession. (The greenback gained as much as 10% and 9% in the wake of the Tech bubble burst and global financial crisis of 2008)

EUR/USD
BEARISH

Data provided by



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily 41% 30% 34%
Weekly 14% -18% -6%

Figure 2: US Dollar Typically Benefits from Fed Emergency Rate Cuts

US Dollar, Gold Price, S&P 500 Outlook: Impact of Emergency Fed Rate Cuts

Gold Price Response to Fed Emergency Rate Cuts

Gold prices have tended to benefit from inter-meeting rate cuts by the Federal Reserve. However, this is much more the case in the longer term with the precious metal vulnerable to margin call induced selling in the short term. This has been evident in recent weeks with panic selling sparking a broad liquidation in various asset classes.

Figure 3: Gold Prices Outperform on Fed Emergency Rate Cuts

US Dollar, Gold Price, S&P 500 Outlook: Impact of Emergency Fed Rate Cuts

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— Written by Justin McQueen, Market Analyst

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