Bond Traders See Fed Facing an All-or-Nothing Decision

On Feb. 25 at 3 p.m. New York time, Federal Reserve Vice Chair Richard Clarida said it was “still too soon” to say whether the spreading coronavirus would result in a material change to the central bank’s economic outlook. For months, that has been the lofty bar for officials to shift from their current stance on monetary policy. At that moment, the S&P 500 Index was at 3,155, down about 7% from its record set the week before, and the benchmark 10-year Treasury yield was near a record low at 1.34%.

Suffice it to say, the financial markets have only worsened since then. Stocks entered a correction at the fastest pace ever by falling more than 10% from their Feb. 19 peak, while 10-year yields dipped below 1.25% and two-year yields hurtled toward 1% in the steepest weekly decline since the financial crisis. Remember, the current fed funds rate is well above those, at 1.5% to 1.75%. Simply put, in a matter of just a few days, the bond market has priced in a tremendous amount of action from the Fed, in stark contrast to Clarida’s comments and those more recently from Chicago Fed President Charles Evans, who on Thursday called it “premature” to think about changing monetary policy.