Expectations for a rate cut will fade as coronavirus fear eases, Fed’s James Bullard says

Markets expecting an interest rate cut are reacting to the coronavirus scare and likely will reverse once the fear starts to fade, St. Louis Fed President James Bullard said Friday.

Central bank officials have indicated that they are content to keep policy on hold as they watch economic developments play out.

However, traders in the fed funds futures market are indicating about a 54% chance of a rate cut by June and a 58% probability of a second move lower by the end of the year, according to the CME’s FedWatch tracking tool.

In an interview on CNBC’s “Squawk Box,” Bullard pushed back on the likelihood of a cut, saying current policy seems right considering the pace of the record-breaking U.S. expansion.

“There’s a high probability that the coronavirus will blow over as other viruses have, be a temporary shock and everything will come back. But there’s a low probability that this could get much worse,” he said. “Markets have to price that in, and that drags down the center of gravity a little bit. But if this all goes away, I expect that pricing will come back out of the market and we’ll be back to the on-hold scenario.”

Bullard spoke the day after Fed Vice Chair Richard Clarida jolted markets when he told CNBC that he pays less attention to market pricing and more to economist forecasts, which don’t see the Fed cutting. The statement helped exacerbate a sell-off that came amid heightened fear that the coronavirus spread could be even worse than thought.

Aside from the virus worries, Fed officials have been generally optimistic about the outlook, saying the strong U.S. labor market and signs of a pickup in global growth are indications that rates are probably appropriate.

The Fed cut rates three times in 2019 but has held the line at the last two meetings.

“If you think that this virus is going to dissipate and we’re going to have temporary shocks and then everything’s going to go back to normal, then I think the Fed’s in great shape and we don’t have to lower rates in that scenario,” Bullard said. “A lot of the news on the U.S. economy has been good in the last couple of months. I’ve been arguing we’re in good shape for a soft landing in the U.S. economy.”