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Fed slashing rates to zero is more likely than a recession, Barclays' top economist says

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Why a Fed rate cut to zero may be more likely than a recession

Top Wall Street economist Michael Gapen expects the Federal Reserve will do what's necessary to contain the coronavirus' impact on the U.S. economy — even if it means slashing interest rates to 0%.

"The likelihood of getting to zero is higher than the risk of a recession," the head of U.S. economics research at Barclays told CNBC's "Trading Nation" on Friday. "There is probably a low risk of a recession, a  1 in 4 maybe at the most."

It's a move that would be deeper than during the financial crisis. That downturn prompted the Fed to cut rates to a range-bound 0%-0.25%.

"They certainly haven't laid out a lot of plans. But certainly they would not stop at zero." Gapen noted. "I think they would be prepared to do more."

Last Tuesday, the Federal Reserve delivered an emergency half percentage point cut due to growing coronavirus fears. It brought the Fed's current target to 1%-1.25%.

"Where I think the concern lies is does a dip, a V-shaped outcome from a virus create a credit event? Then, you could get a recession kind of outcome," he said.

Gapen is operating on the notion that the Fed has the tools to prevent a recession. He lists a small quantitative easing program and introducing forward guidance as options to complement rates at zero.

"We certainly think the Fed would be prepared to do more," said Gapen. "There's a lot of volatility in markets, and the Fed is very concerned about market functioning and keeping liquidity free flowing and credit available."

Yet he acknowledges the number of unknowns regarding coronavirus, highlighting the infectious rate as a major one.

The longer social distancing and quarantines are in effect, Gapen warns the more damage they'll inflict on corporate balance sheets, hiring and consumer spending.

"We don't know the extent of the outbreak. We do think testing will be coming into place soon, and we'll know to what degree or at least have a better idea to what degree this has spread throughout the United States," he said "Is it regional hot pockets or is it kind of hot pockets throughout the United States?"

Right now, Gapen's base case is the Fed will cut rates by a quarter point at its March 17-18 meeting and in April. 

"We think 50 more basis points of cuts are coming," Gapen said. "We don't know if we're going to be at zero yet. But it's reasonable to think about what if."

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Fed could slash rates to zero due to coronavirus, Barclays' top economist says