Fed slashes interest rates to shield economy from coronavirus risks

US Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve cut interest rates during a news conference in Washington, US, on March 3, 2020. (Reuters)

The US Federal Reserve cut interest rates on Tuesday in an emergency move designed to shield the world’s largest economy from the impact of the coronavirus.

It was the Fed’s first emergency rate cut since 2008 at the height of the financial crisis, underscoring how grave the central bank views the fast-evolving situation.

In a statement, the central bank said it was cutting rates by a half percentage point to a target range of 1.00 percent to 1.25 percent.

“The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity. 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,” the Fed said a statement.

The decision was unanimous among policymakers.

In a news conference, Federal Reserve Chair Jerome Powell said the coronavirus would weigh on the US economy for some time. He said he believed the central bank’s action would provide “a meaningful boost to the economy.”

“We saw a risk to the outlook for the economy and chose to act,” Powell said. “I do know that the US economy is strong.. I fully expect that we will return to solid growth and a solid labor market as well.”

The Fed’s decision to cut interest rates before its next scheduled policy meeting on March 17-18 reflects the urgency with which the Fed feels it needs to act in order to prevent the possibility of a global recession.

US stocks initially surged on the move, which had increasingly been expected as it became evident the coronavirus would not be contained to its epicenter in China. With 90,000 cases worldwide in 77 countries and territories, the virus has upended global supply chains, triggered cancellations of sports events, business meetings and other large gatherings, and
torpedoed global stock prices on fears it could cause a recession.

Equities reversed many of their initial gains within minutes of the unscheduled announcement by the Federal Open Market Committee, the central bank’s policy arm. US Treasury debt prices surged, sending bond yields lower. Interest-rate futures traders immediately began pricing in even more rate cuts in coming months.

“Normally, markets would welcome a rate cut, and they were hoping for it,” said Peter Kenny, Founder of Kenny’s Commentary LLC. “Now that we’ve got it, the question is what’s next.”

Powell had earlier on Tuesday taken part in a conference call with the top finance authorities from the world’s seven largest economies, which concluded with a statement that they would take all appropriate measures to support the economy. At his news conference, Powell said the Fed was in active discussions with other central banks.

“I’m a little surprised. I didn’t expect that at 10 o’clock today, I thought you’d see something coordinated among central banks,” said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York.

US Treasury Secretary Steven Mnuchin applauded the Fed’s decision, saying it would help the U.S. economy. In a tweet after the Fed move, President Donald Trump called on the central bank to cut even more. “More easing and more cutting,” he said.

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