Wall Street is increasingly betting on interest rate cuts from the Federal Reserve in the coming months to combat the negative economic impact from the coronavirus.
Goldman Sachs said it expects the Fed to deliver an interest rate reduction of 75 basis points between March and June. Bank of America now sees a 50 basis point cut at the Fed's March meeting, adding that an emergency move prior to that is possible.
"Although moderate Fed rate cuts are unlikely to be very powerful, the committee will probably be reluctant to disappoint market expectations for substantial rate cuts for fear of tightening financial conditions further," Jan Hatzius, Goldman's chief U.S. economist, said in a note Friday.
Goldman's expectations largely match the market's outlook for monetary policy. Amid the massive sell-off this week, the fed funds futures market has assigned a 100% chance of a rate cut at the Fed's March policy meeting, according to the CME FedWatch Tool. The market is split over whether that will be a quarter percentage point or half-point reduction.
"The Fed is being called into action," Michelle Meyer, Bank of America's head of U.S. economics, said in a note on Friday. "What looked like just a supply shock from COVID-19 as a result of broken supply chains is now also becoming a demand shock. An adverse feedback loop has developed between consumer sentiment and market participants. Fed cuts may be able break or slow that loop."
However, some Fed officials expressed reluctance to cut rates immediately. St. Louis Federal Reserve President James Bullard said Friday before he would consider cutting interest rates.
Goldman said the coronavirus-triggered slowdown would be "a short-lived global contraction that stops short of an outright recession."
"Our new baseline scenario involves a continued slowdown in infections in China that allows for a slow recovery in high-frequency indicators of economic activity," Hatzius said. "It also includes moderate supply chain disruptions in the global goods-producing sector.'
Goldman said this week it sees zero earnings growth for American companies in 2020 due to the coronavirus.
Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.