The Federal Reserve slashed interest rates by half a percentage point in the first such emergency move since the 2008 financial crisis, amid mounting concern that the coronavirus outbreak threatens to slow or stall the record U.S. economic expansion.
“My colleagues and I took this action to help the U.S. economy keep strong in the face of new risks to the economic outlook,” Fed Chairman Jerome Powell told a hastily convened press conference in Washington on Tuesday. “The spread of the coronavirus has brought new challenges and risks.”
But in a sign of how skeptical investors are that rate cuts will be an effective tool in combating the economic damage caused by the virus, U.S. stocks only rallied briefly after the surprise announcement.
The S&P 500 index fell as much as 2% following Powell’s remarks before paring losses while the 10-year Treasury yield plunged toward 1%. Fed funds futures are pricing in roughly a total of a percentage point of easing this year.
The central bank said in its statement that it was “closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”
Powell, in response to a reporter question about the scope for further moves, said “we do like our current policy stance,” before repeating the Fed’s reference to taking action if needed.
G-7 Coordination
The Fed’s decision could presage a wave of easing from other central banks around the world although those in the euro-area and Japan have less scope to follow with rates already in negative territory.
It came hours after Powell and finance chiefs from the Group of Seven nations said they would “use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”
The vote for the rate cut to a range of 1% to 1.25% was unanimous. The Fed also said in the statement that the “fundamentals of the U.S. economy remain strong.”
The Fed move followed public pressure for a cut by President Donald Trump, whose stewardship of the economy is central to his reelection campaign this year.
After today’s shift he called for more, demanding in a tweet that the Fed “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.”
U.S. central bankers were scheduled to gather March 17-18 in Washington. Tuesday was the first time the Fed had had acted outside its normal cycle of meetings or cut by more than 25 basis points since 2008.
The reduction marks a stark shift for Powell and his colleagues. They had previously projected no change in rates during 2020, remaining on the sidelines during the election year, after lowering their benchmark three times in 2019 to a range of 1.5% to 1.75%.
Clarida Stance
As recently as last week, some officials, including Vice Chairman Richard Clarida, had indicated they thought it was too soon to respond to the virus. They pledged to monitor the situation, but argued monetary policy was already easy and the fundamentals of the economy strong with unemployment near a 50-year low.
But as the number of reported cases of the virus rose around the world in recent days and the U.S. reported its first fatality, traders increasingly bet the Fed would step in. Powell seemed to cement that view with a promise on Friday to “act as appropriate,” which lent some support to stocks.
Lower rates do little for factories lacking needed materials from abroad and are unlikely to spur consumers to shop if they’re scared of infection. But they should support consumer and business sentiment as well as ease financial conditions by making debt payments easier to manage and by calming market volatility.
