This article is from the source 'nytimes' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at https://www.nytimes.com/2020/03/03/business/economy/fed-interest-rates-coronavirus.html

The article has changed 18 times. There is an RSS feed of changes available.

Version 5 Version 6
Fed Slashes Interest Rates in Emergency Move as Coronavirus Fears Mount Fed Slashes Interest Rates in Emergency Move as Coronavirus Fears Mount
(about 1 hour later)
The Federal Reserve slashed interest rates on Tuesday in an extraordinary attempt to pre-empt economic fallout as fears about coronavirus mounted, with policymakers voting unanimously for their biggest single cut — and first emergency rate move — since the depths of the 2008 financial crisis. The Federal Reserve slashed interest rates on Tuesday in an extraordinary attempt to contain economic fallout from the coronavirus, with policymakers voting unanimously for their biggest single cut — and first emergency rate move — since the depths of the 2008 financial crisis.
“The virus and the measures that are being taken to contain it will surely weigh on economic activity” for “some time,” Jerome H. Powell, the Fed chairman, said at a news conference in Washington following the announcement. “The magnitude and persistence” remain “highly uncertain” and “the situation remains a fluid one,” he added. “The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time,” Jerome H. Powell, the Fed chairman, said at a news conference in Washington following the announcement. “The situation remains a fluid one.”
Rates are set in a 1 percent to 1.25 range following the announcement and Mr. Powell signaled a willingness to do more if needed.Rates are set in a 1 percent to 1.25 range following the announcement and Mr. Powell signaled a willingness to do more if needed.
While he and his colleagues “do like our current policy stance,” he said they are “prepared to use our tools and act appropriately, depending on the flow of events.” While Mr. Powell and his colleagues “do like our current policy stance,” he said they are “prepared to use our tools and act appropriately, depending on the flow of events.”
The Fed’s 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.The Fed’s 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 spiked more than 1 percent immediately after the Fed said it would cut interest rates, before turning lower. Treasuries surged as well, pushing the yield on the benchmark 10-year Treasury note to a record low of 1.02 percent on Tuesday. Stocks in the United States spiked more than 1 percent immediately after the Fed said it would cut interest rates, before turning lower. Treasuries also surged, pushing the yield on the benchmark 10-year Treasury note to close to record lows as investors continued their flight to safe investments.
The emergency reduction underlines the fraught moment economic policymakers 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. Treasury Secretary Steven Mnuchin, asked about ongoing volatility in the markets, said he saw no need to halt trading to calm investors.
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. “The markets are working properly and we have proper circuit breakers in place,” Mr. Mnuchin told reporters on Tuesday.
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. It 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. Investors expect further rate cuts, based on market pricing. But they might also be worried that the central bank is left with little room to avert coming damage from the virus, which has already led to schools closing, travelers canceling trips, and companies slashing their growth outlooks as more cases emerge in the United States.
“Maybe there’s a stronger sense that we’re closer to being out of ammo — this is a real shock, and what is a rate cut going to do,” Julia Coronado, founder of the research firm MacroPolicy Perspectives, said. “We don’t know where it is, who has it, or how far it is going to spread.”
Get an informed guide to the global outbreak with our daily coronavirusGet an informed guide to the global outbreak with our daily coronavirus
newsletter. newsletter.
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. This cut leaves the Fed with limited room to lower rates further should the economy run into danger. Going into the last recession, from 2007 to 2009, the Fed cut rates from above 5 percent. Now it will have just four quarter-point moves left at its disposal.
The emergency reduction underlines the fraught moment economic policymakers 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.
Many economists predict that the United States could face a dramatic slowdown — or even recession — if efforts to contain the spread of the virus fail. Preventive measures could scare consumers away from shopping malls, movie theaters and restaurants, kicking the legs out from underneath the household spending that has powered America’s record-long expansion.
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. Unemployment in the United States remains at a 50-year low and most economic indicators do not yet reflect virus fallout.
The Fed’s 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.
But 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.
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.”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.”
Mr. Dutta added that “the panic needs to come from the opposite of 17th Street” — which is where the White House is.Mr. Dutta added that “the panic needs to come from the opposite of 17th Street” — which is where the White House is.
President Trump, who has no control over monetary policy, has been urging the Fed to lower interest rates, saying the United States 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. President Trump, who has no control over monetary policy, has been urging the Fed to lower interest rates, saying the United States. 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. For now, the White House seems unconvinced other measures will be necessary. Speaking before the House Committee on Ways and Means, Mr. Mnuchin attempted to project calm, insisting that the current volatility was not comparable to the 2008 financial crisis and that the disruptions to travel and supply chains would abate. However, he made clear that the Trump administration is preparing for the economy to take a hit this year.
Mr. Mnuchin said that the Treasury Department has set up a group within 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. “I would say this is not different than any severe situation,” Mr. Mnuchin said, “This is going to have an impact on the short term in the economy.”
This cut leaves the Fed with limited room to lower rates further should the economy run into danger. Going into the last recession, from 2007 to 2009, the Fed cut rates from above 5 percent. Now it will have just four quarter-point moves left at its disposal. The Treasury secretary has created a task force within his department to develop stimulus proposals, should additional efforts be needed. Mr. Mnuchin said the administration will not demand that a payroll tax cut — which Mr. Trump called for on Monday evening — be included in the initial relief package, but that he was looking at ways to help businesses if they need support. A White House official said that Mr. Trump would also likely support infrastructure investment as part of a stimulus package.
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.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.”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.”
Mr. Powell said the virus response would need to be multifaceted, coming from health care professionals and fiscal authorities when they deem it appropriate. But the European Central Bank and the 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.
“We do recognize that a rate cut cannot reduce the rate of infection, it won’t fix a broken supply chain,” he said. “We get that.” The lack of global policy space — and a building sense of government inaction at home — leaves more pressure on Mr. Powell and his colleagues.
But he would not specify how much he expected other central banks to act to boost growth, or whether the economy needed Congress and Mr. Trump to provide a fiscal stimulus like tax cuts or spending increases. “The Fed is carrying the burden for everyone else out of ammunition globally, and for the lack of an effective fiscal response,” Ms. Coronado said.
Mr. Powell also would not say how Fed officials might adjust interest rates if a growth slowdown from the virus fails to materialize — or what economic data points might cause the central bank to act again to cut rates if the virus is worse than expected. Mr. Powell said the virus response would need to involve more than just the Fed’s action.
“We do recognize that a rate cut cannot reduce the rate of infection, it won’t fix a broken supply chain,” he said. “We get that, we don’t think we have all the answers.”
But he did not specify whether the economy needed Congress and Mr. Trump to provide a fiscal stimulus like tax cuts or spending increases. Mr. Powell also would not say what economic data points might cause the central bank to act again to cut rates if the virus is worse than expected, or what other central banks might do next.
“Central banks are doing what makes sense in their particular institutional contexts,” he said. “But we’re all talking to each other on an ongoing basis.”
Alan Rappeport contributed reporting from Washington.Alan Rappeport contributed reporting from Washington.