The Timing Is Suspect
Coming off the Dow Jones Industrial Average’s largest single day points gain in history, the U.S. federal reserve came out swinging Tuesday morning with a surprise 50 basis point rate cut. This is the first surprise rate cut from the Fed since the financial crisis in 2008. So, why did they do it?
There’s so much uncertainty about what the real economic threats of the Coronavirus are. The Feds reasoning behind the unanimous decision to cut rates is to proactively get ahead of the situation in case it gets worse. According to CNBC, the Fed claims the fundamentals of the U.S. economy remain strong, but the continuing risk to the economy posed by the Coronavirus called for preventative measures.
Topstep Coaches Field Questions About Surprise Fed Rate Cut
We understand the Fed’s intent with this move, but is it causing panic? The initial knee jerk reaction from the stock market was positive. The Dow Jones, S&P 500 and Nasdaq futures were all trading near their lows when the news broke, then quickly rallied up to new daily highs. The aftermath turned into more of the panic selling that we saw all last week.
President Trump has been saying that the Fed raised rates too fast after the 2016 presidential election, and has been calling for rate cuts ever since. Today he seems happy, but not satisfied. With the fed rate now sitting at a range from 1-1.25%, it’s a slippery slope back down to ZERO, which is where it was for nearly 10 years before Trump was elected. And, U.S. economists are now coming out saying the probability of 0% interest rates by the end of the year is increasing.
The Fed Can’t Cure Coronavirus
No, this will not cure anyone, but it will curb the potential economic fallout. The way they see it is, if they’re right, great! If they’re wrong, well, no harm no foul. It should also be noted that this is one of the first responses from a central bank since the initial outbreak of the virus, and it came at a time of great global economic uncertainty.
The fed doesn’t have a lot of tools when it comes to combating Coronavirus, but interest rates are one of them, so this is their way of getting involved. Federal Reserve Chairman Jerome Powell did try to alleviate concerns by coming out saying the Fed is in talks with other central banks to discuss next steps, further ensuring that it’s a group effort making certain all measures are being taken.
How To Trade This Market
This announcement created another increase in volatility. Our coaches' best advice is to simply reduce your size, or even take a break and sit on the sidelines. It feels like we’re still in a “risk off” trading environment, so the big moves can keep coming.
Stay patient and let the trades come to you. Wait for the right opportunities. The less risk you take on in this environment the better. If the volatility does scare you, but you still want to participate, take a look at the Topstep Swing Trading Combine.
Our Swing Trading Combine utilizes the CME Group’s Micro E-Mini futures contracts, which offer a low risk and low cost barrier to entry, allowing you to hold trades longer to catch the bigger moves. After all, the best way to learn about the markets is to be in the markets.
Stay safe and Trade Well!