Still uncertain about the magnitude or persistence of any negative economic shock, the Fed resists a coronavirus-induced rate cut. Unless credit markets stumble more severely, it will try to delay a cut until justified by the data.There will be skeptics about the efficacy of a rate cut. Don’t make the mistake of thinking that a Fed rate cut won’t have a positive impact on the economy. Fed inaction would only worsen the outlook.

In the wake of this week’s turmoil market participants are now pricing in at least two rate cuts for this year. A wide range of Federal Reserve officials, however, have pushed back on the idea that they are poised to cut interest rates this year. The latest was Fed Vice Chair Richard Clarida, who today said “…it is still too soon to even speculate about either the size or the persistence of these effects, or whether they will lead to a material change in the outlook”

This is completely unsurprising. Fed officials are naturally inclined to embrace the “temporary shock” scenario.The Fed positioned itself to leave rates unchanged for the year given that the economy had regained its footing. The Fed will worry that the fears evident in the markets this week will ebb as quickly as they swelled, leaving them in a position of having cut rates unnecessarily and just ahead of a large inventory correction phase for the global economy. In addition, the Fed may view the stock market declines as expected given concerns that asset prices had become elevated.

Consequently, we are in a familiar place. Market participants and the Fed are on a collision course. Typically, market participants win that game. It often takes time for the Fed to get there, but once they do, they move quickly. They will move more quickly if they perceive that credit markets are at risk of tightening substantially, so watch that space. Otherwise, they will be watching the data flow.

Realistically, the Fed will eventually need to fall in line with market expectations.The ongoing anxiety about the virus and its potential impacts looks likely to continue for the time being and the longer it continues, the greater the negative impact on activity. Absent a rapid reversal of recent events, Fed will eventually need to provide some cushion for markets and the economy.

But would a Fed rate cut even do any good? After all, the primary concern is the potential disruption to the supply side of the economy. The Fed can’t restart factories. The Fed can’t make a vaccine. And on the demand side, the Fed can’t make people spend if they are too scared to leave their homes.

I don’t believe this would be a dominant view holding back Fed action should the economy or markets stumble meaningfully.The Fed can certainly help prevent the financial sector from choking off the economy even further. Falling long term yields suggest the neutral rate of interest, at least for the near term, is falling. To just hold financial accommodation neutral, the Fed needs to react by reducing policy rates. Failure to do so would lead to tighter financial conditions and worsen any coronavirus induced downturn.

In addition, the Fed can short-circuit panic on Wall Street and in turn prevent that panic from spreading to Main Street.If the populace becomes more concerned about the potential impacts of the virus, those concerns would only be heightened by crashing markets or a sharp contraction of credit. Fed easing to support financial markets would be essential to prevent such a chain of events.

Bottom Line: All told, we are in a familiar place. The Fed wants more information before acting, while market participants have already decided action will be forthcoming. The Fed still hopes there is a reasonable chance that market participants reverse their bets before too long and hence is prepared to bide its time. Be prepared that the Fed will likely continue to shrug off market concerns without seeing a more imminent threat but that per usual when they move, they will move quickly. Also be prepared for easing to have a positive impact should the Fed decide it is needed.