Market Expects Fed Reaction (February 28, 2020)

Seana Smith: Let's talk about markets one more time, falling sharply on the coronavirus concerns today, the Dow facing its biggest weekly loss since 2008. This coming as the World Health Organization raised its global risk assessment level of the outbreak to very high. We have Julien Scholnick is with me, portfolio manager at Western Asset Management. Julien, what do you think? Do you think that this could be a bit of an overreaction or do you think we could see some more downside risk ahead?

Julien Scholnick: I mean, I think it's absolutely justified. I mean, the market is really grappling with, you know, it's a pretty large unknown right now and no one really knows the magnitude of this, the longevity of it. Medical community is still trying to determine transmission rates and what mortality rates are ultimately going to be. And while there's been some positive developments in terms of containment within China, it's obviously spread globally. And I think that has investors and individuals rightly worried. You know, I think we take some confidence in the dramatic response that Chinese policymakers have taken. And I think we take some comfort that governments globally, along with the medical community and private entities, will over time come up with an appropriate response. But you know, how long that takes is anyone's guess.

Seana Smith: Fed Chair Jerome Powell is saying that the coronavirus does pose evolving risks to economic activity. He also went on to say that they are closely monitoring developments and they will use their tools and act as appropriate. From where you stand, do you think the Fed should act next month?

Julien Scholnick: We do, and we think that the Fed is very much biased to be supportive. And I think you just have to look at their actions in 2019 where the Fed was ahead of the markets because they were concerned about, you know, downside risks to growth and inflation. And so having a shock of this magnitude which clearly has potential negative implications for growth and inflation. You know, we think that's going to force them. And, you know, they'll want to react because of that. So we do think that the Fed is not going to be behind the curve here. We think you just have to look at market pricing with 2-year notes at 90 basis points and 5-year notes at 95 basis points. The market is not doubting that the Fed is going to react, which I may mentioned, is a very different situation than you had in the fourth quarter of 2018. The Fed was behind the curve and you saw a very severe market correction as a result of that.

Seana Smith: All right. Well, we'll leave it there.