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US: Fed to slash rates back to 0.00%; recession is increasingly highly – Wells Fargo

Following the events of the last 24 hours, economists at Wells Fargo changed their economic forecasts. Now they see a deeper contraction in US GDP and expect the Fed Funds rate to drop back to the 0.00% – 0.25% range. 

Key Quotes: 

“We now think it is likely that the committee will slash its target range for the fed fund rate 100 bps on March 18, if not sooner. This would return the fed funds rate to the range of 0.00% to 0.25% where the FOMC maintained it from December 2008 to December 2015. Moreover, the Fed may provide some “forward guidance” by stating that it intends to keep the range at that level for an extended period of time.”

“We looked for a mild contraction in U.S. GDP in the second quarter with some bounce-back later this year. It looks increasingly likely that the coming contraction will be deeper and more protracted than we were anticipating just a few days ago. In short, it seems that recession is increasingly highly. The airline and hotel industries are in free fall, and there will be multiplier effects from cutbacks in those industries. Moreover, banks will likely begin to tighten credit standards—credit spreads in the corporate bond market have already widened significantly—and the uncertainty that pervades the nation at present is an awful backdrop for business fixed investment spending. Businesses may be loath to displace workers right now, but layoffs will eventually commence when order books begin to dry up.”

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