Mar 3, 2020

The Fed: Fed cuts rates by half a percentage point to combat coronavirus slowdown

Jeff Cox

The Federal Reserve announced an emergency rate cut Tuesday of half a percentage point in response to the growing economic threat from the novel coronavirus.
The move was the first such cut since December 2008, during the financial crisis. It comes amid a volatile patch on Wall Street and amid a steady stream of hectoring from President Donald Trump, who has called for lower rates to stay competitive with policy at other global central banks.
"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."
Markets were volatile after the move, initially surging higher than briefly turning negative before heading back up again.
The Fed has scheduled a news conference at 11 am.
"The committee obviously decided not to wait for things to deteriorate — I think they know as we all should that the headlines over the next few days are likely to be alarming as they pertain to the spread of the virus," said Eric Winograd, senior economist at AllianceBernstein. "The Fed obviously cannot address the virus itself by cutting rates, but they can hope to short circuit the potential for a negative response in financial markets that could make the economic impact of the virus even worse."
Winograd said he thinks the Fed could announce an additional cut at its March 17-18 meeting.
With the change, the Fed's benchmark funds rate will now be targeted in a range between 1%-1.25%. The Fed had reduced the rate three times in 2019 for a total of 75 basis points.
Markets had been widely expecting the U.S. central bank to take some type of action, with anticipation of a 50 basis point cut by the next Federal Open Market Committee meeting later this month. Goldman Sachs economists over the weekend said they anticipated a 50 basis point cut that could come before the meeting.
The move comes the same morning the G-7 announced that it would commit unspecified tools to help the global economy deal with the threat, and as Wall Street was in the midst of another market sell-off.
In addition to the cut on its benchmark overnight borrowing rate, the Fed also announced a half-percentage-point cut on the interest it pays on excess bank reserves. The IOER is used as a guardrail for the fed funds rate.
In the days prior to the reduction, Fed officials had continued to emphasize the economy's durability in light of the disease scare. Federal Reserve Chairman Jerome Powell said in a statement released during the trading day Friday that teh U.S. economy remained "strong" though he recognized the COVID-19 spread as posing "evolving risks" and noted the Fed would "act as appropriate."
However, that has come amid doubts over how much a Fed cut could address supply-side damage from a disease spread.

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