Fed slashes interest rate amid coronavirus concerns
WASHINGTON – The Federal Reserve cut interest rates by half a percentage point Tuesday morning in a surprise bid to stabilize the U.S. economy as fears grow over the impact of coronavirus.
The Fed’s 10-member Open Market Committee voted unanimously to cut the nation’s benchmark short-term rate by 50 basis points from a range of 1.75% to 1.5% to a range of 1.25% to 1%, effect March 4, according to a statement released by the Fed. The committee was not scheduled to meet again until March 17-18, meaning it convened a rare emergency meeting for a vote.
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” the statement read. “In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point … The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”
In a Tuesday press conference, Fed Chairman Jerome Powell told reporters that the broader spread of the virus, including in the U.S., over the past week convinced monetary policymakers that it was time to act.
“We’ve come to the view now that it is time for us to act in support of the economy and once you reach that decision you decide to go ahead,” he said. “I don’t think anyone knows how long it will be, but I do know that the U.S. economy is strong, and we will get to the other side of this. I fully expect we will return to solid growth and a solid labor market as well.”
Should the virus subside sooner than expected, Powell said that the Fed would reassess its rates but wouldn’t commit to whether the committee might raise rates after Tuesday’s surprise cut.
Powell told reporters that he was in constant contact with leaders at central banks around the world. He also pointed to a Tuesday statement from finance governors and ministers from Group of Seven nations as evidence that countries were committed to acting as appropriate through fiscal policy to help forge the financial tide.
Responding to the criticism that a rate cut won’t help in a supply-side disruption like that of the coronavirus, as opposed to demand-side disruption such as during the 2009 Great Recession, Powell conceded that it was not a silver bullet.
“We do recognize that a rate cut will not reduce the rate of infection, won’t fix a broken supply chain – we get that. We don’t think that we have all the answers,” he said. “But we do believe our action will provide a meaningful boost to the economy. More specifically, it will support accommodative financial conditions and avoid a tightening of financial conditions, which can weigh on activity. And it will help boost household and business confidence.”
The Fed faced difficult financial conditions after last week’s market correction, or a decrease of 10% or more. Companies that had exposure to overseas supply markets or depended on travel took a beating in the frenzied sell-off. As investors piled into U.S. Treasuries instead, interest rates on traditionally stable bonds fell to under 1.2% at the market’s opening Tuesday.
Despite the largest rate cut by the Fed since the Great Recession, Wilmington Trust chief economist Luke Tilley said that his investment firm continued to recommend reducing risk in the stock market.
“Clearly, rate cuts cannot do anything to heal the sick or stop the spread of the virus, but they can make equities more attractive simply by making Treasuries more expensive. Additionally, lower rates at the shorter end of the curve can be helpful to any firms that need to refinance for short-term funding,” he wrote in a Tuesday blog detailing the rate cut. “Despite their action, we remain wary of the risks to growth, we expect disruptions to economic growth, and further volatility in markets, and we continue to recommend an underweight to equities.”
President Donald Trump, who has been calling for the Fed to cut rates to bolster a shaken U.S. economy amid the virus’s outbreak, wrote on Twitter Tuesday that while he supported the action, he also wanted more.
“The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!” he wrote.
Despite the president’s criticisms, Powell told reporters that the Fed does not consider the input of politicians into its decision-making.
“We’re never going to consider any political consideration whatsoever,” he said.
By Jacob Owens