(Reuters) - Markets began pricing in a negative U.S. rate environment for the first time on Thursday, a place the Fed is determined not to go, as investors grappled with the economic consequences of the new coronavirus.
Fed officials including Chairman Jerome Powell have said that they do not see negative rates as appropriate in the United States.
But some investors may be seeing a much worse outcome for the COVID-19-led downturn that could force the Fed to get even more experimental with its crisis response.
"Anything is possible. We’re just in uncharted territories as far as the U.S. economy goes," said Tom di Galoma, a managing director at Seaport Global Holdings in New York.
Fed funds futures have begun pricing in a slightly negative rate environment beginning next year.
The U.S. central bank cut interest rates to zero in March and has launched numerous programs designed to shore up markets and backstop the economy as unemployment soars and growth sputters.
San Francisco Federal Reserve Bank President Mary Daly said on Thursday the Fed still has tools to boost the economy, and that people she speaks with do not expect a "V"-shaped recovery.
The Fed is viewed as reluctant to cut rates into negative territory due to concerns it may not be effective in stimulating growth, and because it may disrupt the large U.S. money markets.
Jeffrey Gundlach, chief executive of DoubleLine Capital said on Twitter on Wednesday that pressure on the Fed to cut rates below zero will build as the U.S. Treasury ramps up its issuance of short-term debt, but said any move to do so would be "fatal."
Strong demand for low risk, short-dated U.S. debt pushed rates on some Treasury bills into negative in March as the virus spread globally and stock markets plunged.
An uptick in buying short-dated debt was likely a factor behind the fed funds move on Thursday as two-year Treasury yields also hit record lows.