With the Federal Reserve expected to act soon in response to the coronavirus scare, there's a chance that the central bank could take policy back to where it was during the financial crisis. Goldman Sachs economists said Sunday that they see the Fed cutting rates by 50 basis points by its March meeting or sooner, and probably 100 basis points this year, a forecast about in consensus with current market pricing. But as short-term rates keep going lower, there's a chance they could go all the way to near zero where they were during the financial crisis.

Traders in the fed funds futures market are indicating about a 9% probability that the fed funds rate, which serves as benchmark for other very short-term rates, will fall to a range of zero to 25 basis points by December, according to the CME's FedWatch tracker. JPMorgan Chase sees the chances even higher. "One of the recurring themes in optimal monetary policy near the zero lower bound is that when growth risks occur with policy rates within the neighborhood of zero, then the central bank should act early and aggressively," JPMorgan's chief U.S. economist, Michael Feroli, said in a note. "This suggests to us that there is a reasonable chance (we subjectively put the odds at one-in-three) that policy rates return to zero before the end of the summer."

Change in approach

While that chance is still small, it's something that was unthinkable just a few weeks ago when policymakers had been in unison saying they were comfortable with the current policy level and not anticipating any moves through at least the rest of the year. However, research suggesting that it's better to act aggressively when rates are already this low could drive even more dramatic action. New York Fed President John Williams caused a stir in July 2019 when he noted the same research that pointed to cutting rates dramatically rather than incrementally when they are already low. "When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress," Williams said in a speech. He had to quickly walk back the remarks, however, when markets took his speech to mean that the Fed was contemplating action.