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Fed Slashes Interest Rates in Emergency Move as Coronavirus Fears Mount Fed Slashes Interest Rates in Emergency Move as Coronavirus Fears Mount
(31 minutes later)
The Federal Reserve slashed interest rates on Tuesday as fears about the economic fallout of the coronavirus continued to mount, announcing its biggest single cut since the depths of the 2008 financial crisis. The Federal Reserve slashed interest rates on Tuesday as fears about the economic fallout of the coronavirus mounted, announcing its biggest single cut since the depths of the 2008 financial crisis.
“The coronavirus poses evolving risks to economic activity,” the Fed said in a statement. “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 coronavirus poses evolving risks to economic activity,” the Fed said in a statement. “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 statement on the vote, which was unanimous, also pledged that the Fed “is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”The statement on the vote, which was unanimous, also pledged that the Fed “is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”
Rates are now set in a range of 1 percent to 1.25 percent, as of the decision. Jerome H. Powell, the Fed chairman, will hold a news conference at 11 a.m. in Washington, the central bank said. Rates are set in a range of 1 percent to 1.25 percent as of the decision. Jerome H. Powell, the Fed chairman, will hold a news conference at 11 a.m. in Washington, the central bank said.
The move came as economists around the globe were sharply downgrading their economic growth expectations for the year as the coronavirus spreads, idling factories, curtailing travel and quarantining workers. Investors, increasingly nervous that the fallout could plunge the global economy into a recession, looked to central banks, first among them the Fed, to respond decisively to the building threat. The move came as economists around the globe sharply downgraded their economic growth expectations for the year as the coronavirus spreads, idling factories, curtailing travel and quarantining workers. Investors, increasingly nervous that the fallout could plunge the global economy into a dramatic slowdown or even a recession, looked to central banks, first among them the Fed, to respond decisively to the building threat.
Stocks in the United States rallied after the Fed said it would cut interest rates. The S&P 500 spiked more than 1 percent immediately after the cut was announced, turning around a downbeat start to the trading day after a statement from the Group of 7 finance ministers and central bankers did not suggest imminent action.Stocks in the United States rallied after the Fed said it would cut interest rates. The S&P 500 spiked more than 1 percent immediately after the cut was announced, turning around a downbeat start to the trading day after a statement from the Group of 7 finance ministers and central bankers did not suggest imminent action.
The Fed’s emergency move underlines what a fraught moment economic policymakers around the world currently face. Coronavirus has torn across the globe, sickening about 90,000 people. While the vast majority of those cases are in China, where the infections first surfaced, major outbreaks have also taken hold in South Korea, Japan, Iran and Italy, and cases are climbing in other countries.The Fed’s emergency move underlines what a fraught moment economic policymakers around the world currently face. Coronavirus has torn across the globe, sickening about 90,000 people. While the vast majority of those cases are in China, where the infections first surfaced, major outbreaks have also taken hold in South Korea, Japan, Iran and Italy, and cases are climbing in other countries.
The virus could exact a heavy economic toll, as it leads to quarantines, shutters factories, and hits investor and consumer confidence.
Stocks bled through their worst losses since 2008 last week, but rebounded Monday as expectations for action from the central bank climbed.
Emergency rate cuts are not without precedent. The Fed’s move Tuesday echoed a 50 basis point rate cut it made in October 2008 as markets melted down in the wake of the collapse of Lehman Brothers, and another it made earlier that year.Emergency rate cuts are not without precedent. The Fed’s move Tuesday echoed a 50 basis point rate cut it made in October 2008 as markets melted down in the wake of the collapse of Lehman Brothers, and another it made earlier that year.
But this time, the central bank moved pre-emptively — trying to get ahead of the economic problem, rather than waiting until the fallout was more fully realized. But this time, the central bank moved pre-emptively — trying to get ahead of the economic problem, rather than waiting until the fallout was more fully realized. The move came after Australia’s and Malaysia’s central banks lowered borrowing costs early Tuesday, and could presage a wave of action from global policymakers as officials rush to offset coronavirus fallout.
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There are limits to what rate cuts can do to contain the damage. While they can bolster confidence and help to keep borrowing cheap, there are questions about how effective rate cuts will be in counteracting the fallout from the virus. Central banks cannot keep disease from spreading, prevent workers from losing hours at work, or mend broken supply chains amid factory delays.There are limits to what rate cuts can do to contain the damage. While they can bolster confidence and help to keep borrowing cheap, there are questions about how effective rate cuts will be in counteracting the fallout from the virus. Central banks cannot keep disease from spreading, prevent workers from losing hours at work, or mend broken supply chains amid factory delays.
And this cut leaves the central bank with limited room to lower rates further should the economy run into danger. Going into the 2007 to 2009 recession, the Fed cut rates from above 5 percent. Now it will have just four quarter-point moves left at its disposal. The Fed’s move “can provide a short-term floor under sentiment, which is what they’ve done today,” Neil Dutta, head of economic research at Renaissance Macro Research, wrote in a note following the announcement. “But the Fed’s tools are imperfect and not adequate to deal with a public health crisis.”
President Trump, who has no control over monetary policy, has been urging the Fed to lower interest rates when asked about the potential economic fallout from the virus. Mr. Dutta added that “the panic needs to come from the opposite of 17th Street” — which is where the White House is.
“As usual, Jay Powell and the Federal Reserve are slow to act,” he wrote on Twitter Monday. President Trump, who has no control over monetary policy, has been urging the Fed to lower interest rates, saying the U.S. should have the lowest borrowing costs. But the Fed’s half-point cut did little to assuage his complaints. After the rate cut, Mr. Trump said on Twitter that it was not enough and suggested that further easing was necessary. “We are not playing on a level field. Not fair to USA,” he wrote.
For now the White House seems unconvinced other measures are necessary. Treasury Secretary Steven Mnuchin said on Tuesday that the Trump administration is not currently considering rolling back or suspending its tariffs on Chinese imports to mitigate the economic effects of the coronavirus.
Mr. Mnuchin said that the Treasury Department has set up a group with the agency to begin looking at tax measures that the Trump administration could take to provide relief to small and medium-sized businesses, if needed. He said that the White House may present proposals to Congress for such “special action” if warranted.
This cut leaves the Fed with limited room to lower rates further should the economy run into danger. Going into the 2007 to 2009 recession, the Fed cut rates from above 5 percent. Now it will have just four quarter-point moves left at its disposal.
Coronavirus is a global problem, and the central bank’s counterparts around the world are in an even weaker position. The European Central Bank and Bank of Japan already have negative interest rates, leaving them with limited room to act to offset any crisis — and placing more onus on fiscal policy.
In a joint statement out earlier Tuesday, leaders of the Group of 7 — which also includes Britain, Canada, France, Germany, Italy and Japan — pledged global coordination and cooperation in containing fallout from the coronavirus but fell short of committing to concrete action.
Global finance ministers and central bankers said they were “closely monitoring the spread of the coronavirus disease” and reaffirmed their “commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”
Alan Rappeport contributed reporting from Washington.