Posted: 3.3.2020

Audio Transcription – 3.3.2020 Market Update – Coronavirus Impact

Hello. I’m John Culhane, Senior Portfolio Manager and Director of Fixed Income for Midland States Bank Wealth Management. Just two weeks before its next regular FOMC meeting and after last week's route in the Global stock markets, the Federal Reserve Bank or the Fed as we call it, announced this morning an emergency 50 basis-point Fed Funds rate cut. This move is meant to help stabilize U.S. economy for the potential adverse effects of the spreading coronavirus and help prolong the longest-ever economic expansion in U.S. history. The move brings the range of the Fed Funds rate to 1 to 1.25%.

In a brief statement after taking this policy action, the Fed noted that "the coronavirus poses evolving risks to economic activity." The statement also notes that "the fundamentals of the U.S. economy remain strong." However, the expected troubling economic impact of the coronavirus is growing. The distress to the U.S. economy will occur via disruptions to the supply chain, weakness in global demand as Asian and European growth falters. There are going to be interruptions in travel and tourism and there’s going to be deterioration in financial conditions.

In a brief news conference, the Fed Chairman Powell stated the U.S. economy is strong. He stated that the strong labor market, the low unemployment rate and the resilient consumer has been the basis for our economic growth over the last couple years. These economic fundamentals as he said were strong and particularly the Fed wants to keep it that way. But let's face some facts, if containment efforts or the virus itself continue to disrupt economic activity, U.S. economy could likely face recessionary conditions, resulting in the Fed cutting even more aggressively. For now, the Fed Funds Futures Contract project that the Fed could cut another 50 basis points before year-end.

Remember this is just a rate cut. It will not fix the global supply chain problems. It will not stop the virus from spreading. It is more of a psychological answer that the markets needed to hear. Eventually this will help companies affected by the supply chain disruptions. As with all Fed easing, tangible economic results take months, not days, for the benefits to develop. Over the next days and weeks, we expect to hear both bad and good news about the coronavirus. Nonetheless, we do expect the U.S. economy to return to solid growth later in the year. If you have any questions or comments, please reach out to us and we'll be happy to answer them. Thank you very much.

John Culhane

Senior Portfolio Manager and Director of Fixed Income