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Fed Makes Emergency Rate Cut, but Markets Continue Tumbling Fed Makes Emergency Rate Cut, but Markets Continue Tumbling
(about 2 hours later)
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 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, 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.” “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 chair, said at a news conference in Washington after the announcement. “The situation remains a fluid one.”
Stocks in the United States spiked only temporarily after the rate cut, as worries about the Fed’s impotence in the face of coronavirus economic risks fueled a market sell-off. Treasuries also surged, pushing the yield on the benchmark 10-year Treasury note below 1 percent for the first time in history, as investors continued their flight to safe investments. Stocks in the United States rallied for about 15 minutes after the rate cut, but worries about the Fed’s impotence in the face of economic risks from the coronavirus quickly fueled a market sell-off. By late Tuesday, stocks were sharply lower and bond yields had plummeted to previously unthinkable lows as investors sought a safe place to park their money. The S&P 500 fell about 2.8 percent, undoing some of Monday’s 4.6 percent surge. The yield on 10-year Treasury notes briefly dipped below 1 percent before closing above that level.
Rates are now set in a 1 percent to 1.25 range and Mr. Powell signaled a willingness to do more if needed. While Mr. Powell and his colleagues “like our current policy stance,” they are “prepared to use our tools and act appropriately, depending on the flow of events.” Interest rates are now set in a 1 percent to 1.25 percent range, and Mr. Powell signaled that further moves were possible, saying the Fed was “prepared to use our tools and act appropriately, depending on the flow of events.”
Investors, increasingly nervous that the fallout could dramatically slow growth or even prompt a global recession, looked to central banks, particularly the Fed, to respond decisively to the building threat. Investors expect further rate cuts and some economists suggested markets had been looking for the Fed to do even more. But investors might also be worried that the central bank is left with little room to avert coming damage from the virus, which has already closed schools, curtailed travel and prompted companies to reduce growth forecasts. But the market’s negative reaction may reflect a recognition that cutting interest rates or engaging in other types of fiscal stimulus will do little to contain the virus that has sickened more than 90,000 people, with major outbreaks taking hold in South Korea, Japan, Iran and Italy. While cutting rates can bolster confidence and help to keep borrowing cheap, it cannot prevent disease from spreading or help companies deal with delayed orders or an infected work force.
“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.” “We do recognize that a rate cut cannot reduce the rate of infection, it won’t fix a broken supply chain,” Mr. Powell said. “We get that — we don’t think we have all the answers.”
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. If anything, containing the longer-term economic fallout may necessitate preventive actions that will weigh on near-term economic growth, like restricting air travel, closing movie theaters, shuttering factories and quarantining workers. China, the initial source of the outbreak, has engaged in those types of restrictions, hurting its economy temporarily but enabling it to slow the virus’s spread.
Other economists speculated that markets might have seen the action as a signal that economic fundamentals are crumbling. Many economists predict that the United States could face a significant slowdown — or even a recession — if efforts to contain an outbreak here fail.
“This could be seen as a panic move,” Ryan Sweet at Moody’s Analytics said in a note, calling the Fed’s decision to move in between scheduled meetings “risky.” Neil Dutta, the head of economic research at Renaissance Macro Research, wrote in a note after the announcement that “the Fed’s tools are imperfect and not adequate to deal with a public health crisis.” He added that “the panic needs to come from the opposite of 17th Street” — which is where the White House is.
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. President Trump said on Tuesday that he might further tighten limits on international travel in hopes of blocking the arrival of more visitors infected by the coronavirus, but he ruled out for now any restrictions on travel within the United States.
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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. “We’re not looking at that at all,” Mr. Trump said. “But we’re looking at other countries and we’re being very stringent,” he told reporters before boarding his Marine One helicopter to fly to the National Institutes of Health for a visit.
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. His comments came as Washington State reported another death from the coronavirus, raising the death toll in the United States to nine.
But this time, the central bank moved pre-emptively — trying to get ahead of the economic problem, rather than waiting until the damage 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 World Bank announced on Tuesday that it was making $12 billion worth of financing available to help countries deal with the health and economic effects of the outbreak.
As recently as late January the Fed signaled it expected to hold rates steady, with no plans to raise or lower borrowing costs after ushering in three cuts in 2019. But officials were already growing concerned about the virus’s potential impact at its last policy meeting and in February, Mr. Powell warned that China’s struggles with the virus could pose broader economic risks. David Malpass, the president of the World Bank, said the bank’s board would respond to requests for funds. The money will be used to strengthen health systems, to improve access to health services and to enhance disease surveillance.
The Fed’s move came after central banks in Australia and Malaysia lowered borrowing costs early Tuesday. Investors still expect the Fed to do more, and are fully anticipating another quarter-point cut at the central bank’s meeting on March 18, potentially followed by another move in April. But the central bank is running low on room to cut rates to avert a significant downturn if things worsen, which could be fueling market jitters. 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.
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, central banks cannot prevent disease from spreading or mend broken supply chains amid factory delays. “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?” said Julia Coronado, a founder of the research firm MacroPolicy Perspectives. “We don’t know where it is, who has it, or how far it is going to spread.”
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.” Other economists speculated that markets might have seen the action as a signal that economic fundamentals are crumbling.
Mr. Dutta added that “the panic needs to come from the opposite of 17th Street” — which is where the White House is. “This could be seen as a panic move,” Ryan Sweet at Moody’s Analytics said in a note, calling the Fed’s decision to move in between scheduled meetings “risky.”
President Trump, who has no control over monetary policy, has been urging the Fed to lower interest rates, saying the United States. But the Fed’s half-point cut did little to assuage his complaints. After the cut was announced, Mr. Trump told reporters that “the rate is too high. It should be eased down so we’re competitive” adding “we should have the low rate. But we have a Fed that doesn’t agree with that. I disagree with them.” Emergency rate cuts are not without precedent. The Fed’s move on Tuesday echoed a 50-basis-point rate cut it made in October 2008 as markets melted down after the collapse of Lehman Brothers, and another it made earlier that year.
Asked if the Fed felt political pressure to cut, Mr. Powell said that in making decisions, he and his colleagues are “never going to consider any political considerations whatsoever.” But this time, the central bank moved pre-emptively — trying to get ahead of an economic problem, rather than waiting until damage 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.
For now, the White House seems unconvinced other measures will be necessary. Speaking before the House Committee on Ways and Means, Mr. Mnuchin insisted 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. As recently as late January, the Fed signaled it expected to hold rates steady, with no plans to raise or lower borrowing costs after ushering in three cuts in 2019. But officials at its last policy meeting were already growing concerned about the virus’s potential effects, and in February, Mr. Powell warned that China’s struggles with the virus could pose broader economic risks.
“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.” The Fed’s move came after central banks in Australia and Malaysia lowered borrowing costs early Tuesday and after a joint statement from the leaders of the Group of 7 — which includes Britain, Canada, France, Germany, Italy, Japan and the United States — pledged global coordination and cooperation in containing fallout from the coronavirus.
Treasury has created a task force to develop stimulus proposals, should additional efforts be needed, he said, adding 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. Mr. Trump, who has played down the economic effect of the virus, has been urging the Fed to cut rates to better compete with other countries that have low or negative borrowing costs. The Fed’s half-point cut did little to assuage his complaints.
In a joint statement earlier on 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. “Finally. Do it more. Do it a little bit more,” the president said of the rate cut. “We’re paying more than other countries; we should be paying less than everybody else. We have the dollar. We have the strength. We have the greatest country on Earth.”
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.” Asked if political pressure fueled the cut, Mr. Powell said that in making decisions, he and his colleagues were “never going to consider any political considerations whatsoever.”
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. For now, the White House seems unconvinced other measures will be necessary. Treasury Secretary Steven Mnuchin, speaking Tuesday before House lawmakers, insisted 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 was preparing for the economy to take a hit this year.
The lack of global policy space — and a building sense of government inaction at home — leaves more pressure on Mr. Powell and his colleagues. “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.”
“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. The Treasury Department has created a task force to develop stimulus proposals, should additional efforts be needed, he said, adding that he was looking at ways to help businesses if they needed support.
Mr. Powell said the virus response would need to involve more than just the Fed’s action. Lawmakers were also working on an emergency spending bill worth $7 billion to $8 billion. The package, which has been quickly negotiated over the past few days, is expected to be significantly larger than what the White House initially proposed eight days ago: $1.25 billion in new funds, paired with a transfer of existing funds from other health programs.
“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.” Mr. Trump continued to suggest that Democrats pass a temporary payroll tax cut, but that seemed unlikely to gain traction. Representative Richard E. Neal, the chairman of the House Ways and Means Committee, told Mr. Mnuchin that any stimulus package should be centered around infrastructure investment rather than additional tax cuts. Mr. Mnuchin said that infrastructure would be central to any such package.
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. Mr. Powell did not specify whether the economy needed Congress and Mr. Trump to provide some form of fiscal stimulus like tax cuts or spending increases. He also would not say what economic data points might cause the Fed — or other central banks — to take additional steps to protect the economy.
“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.”“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. The building sense of government inaction at home puts only more pressure on Mr. Powell and his colleagues.
“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.
Alan Rappeport contributed reporting.