Federal Reserve has cut rates. What does it mean?

What happened?

The Federal Reserve cut federal funds rate by 50 basis points to a target range of 1.00% to 1.25%.

Why is it important?

The market has been pricing in a rate cut at the next meeting of the US central bank scheduled for March 18. The Fed decided to keep ahead of the game and surprise everyone – proactive actions tend to have a greater impact on markets.

Market’s reaction

Indeed, the USD weakened on the move. EUR/USD shot up to 1.12 before correcting down to 1.1150. USD/JPY got below 107.00. XAU/USD came back up to 1,650 – gold tends to strengthen when currencies are devalued by monetary stimulus.

Lower interest rates should have inspired an inflow of money in stocks. However, the bullish spike of S&P 500 was very brief. The index briefly tested 3,135 and then fell below 3,000.

What’s next for traders?

While the emergency rate cut should have calmed the market, so far it hasn’t. On the contrary, many investors seem to see it as a sign of desperation and a proof that the coronavirus is a really big threat for the global and the US economies. The talk that monetary policy is near the limit of its power is getting more and more intense. In addition, Chairman Jerome Powell said that even a half-point rate cut was insufficient to solve multiple economic and health risks posed by the virus.

As a result, it’s necessary to follow the news and remain watchful. Conditions remain favorable for gold. S&P needs to overcome resistance at 3,125 to get a chance to return to 3,190 and 3,280.

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