Fed Makes Emergency Rate Cut to Shield US Economy From Coronavirus

Central bank's move marks the biggest one-time rate cut since 2008 financial crisis
March 3, 2020 Updated: March 3, 2020

WASHINGTON—The Federal Reserve, in a rare emergency step, cut short-term rates by half a percentage point on March 3 to protect the U.S. economy from the growing fallout of the global coronavirus outbreak.

The Fed’s move marks the biggest one-time rate cut since the 2008 financial crisis.

The decision came two weeks before the Fed’s scheduled policy meeting. Fed Chairman Jerome Powell, during a news conference, said that the central bank has “come to the view now that this is time for us to act and support the economy.”

In its last Federal Open Market Committee (FOMC) meeting in January, the central bank left interest rates unchanged, as it concluded that the “prospects for continued economic growth remained favorable.”

Powell said the fundamentals of the U.S. economy remain strong. In the last few weeks, however, due to the economic fallout of the rapidly spreading virus, the members of the FOMC decided that the risks to the outlook have “changed materially.”

“Since then, the spread of the coronavirus has brought new challenges and risks,” Powell said. “The outbreak has also disrupted economic activity in many countries and has prompted significant movements in financial markets.”

Tourism and travel industries, he noted, have been affected by the outbreak, and many industries have started to face supply chain disruptions.

The Fed predicts that the outbreak and the measures taken to contain it will weigh on both the U.S. and the global economy. Hence, the rate cut will provide a “meaningful boost” to the economy and help improve household and business confidence.

Powell didn’t rule out further rate cuts, saying that the bank will “act as appropriate to support the economy.”

After the announcement, President Donald Trump renewed his criticism of the Fed and called on the bank to slash interest rates even further.

“The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors,” Trump wrote on Twitter. “We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!”

The current short-term rates are now between 1 and 1.25 percent, a range not seen since mid-2017.

G-7 Response

Central banks around the world have been responding to the outbreak as well.

Powell and U.S. Treasury Secretary Steven Mnuchin led a conference call on March 3 with finance ministers and central bank governors from other Group of Seven (G-7) countries. The leaders released a statement after the call, announcing a coordinated action to tackle the growing coronavirus fears.

“Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks,” the G-7 statement said.

G-7 finance ministers also said that they were “ready to take actions, including fiscal measures where appropriate.”

Stephen Moore, an economist and former Trump campaign adviser, told The Epoch Times he was pleased with the Fed’s decision but added that there should be more rate cuts as “the money is way too tight.”

This isn’t just about coronavirus, he said.

“They should have done it a week ago. They’re behind the curve. We have a shortage of dollar liquidity in the American economy right now, and so this will hopefully induce the economy with more dollars.”

He said the strong dollar and the inverted yield curve signal that the market is much more worried about deflation than inflation. Hence, he expects to see a couple of more rate cuts.

Deutsche Bank predicts that the Fed will announce two more rate cuts by 0.25 percentage points in the coming months, making the total cuts 1 percentage point.

“Most recent data out of China say the economic impact is severe–the latest PMIs point to a record quarterly decline in output in Q1. Such impacts might occur on a global scale in the months ahead,” Deutsche Bank economists stated in a report.

Market Reaction

Investors have been eyeing the Federal Reserve as the coronavirus outbreak began to take a toll on the markets last week. Stocks rebounded March 2 but fell sharply March 3 in volatile trading after the Fed’s announcement.

The Dow Jones Industrial Average fell 785.91 points, or 2.9 percent, after rising more than 300 points earlier in the day. The S&P 500 and Nasdaq were both down almost 3 percent, as well.

Investors had already priced in a rate cut of 0.50 percentage points for the next FOMC meeting. But they interpreted the emergency rate cut as a panicky move by the central bank, which caused a sharp sell-off in stock markets.

Investors flocked to safe-haven assets such as U.S. Treasury bonds, pushing the benchmark 10-year yield below 1 percent for the first time ever. Gold, meanwhile surged 3.1 percent to $1,644.40 per ounce.

Allen Sukholitsky, chief macro strategist at Xallarap Advisory, told The Epoch Times in an email that the Fed’s emergency cut sparked investor speculation that the Fed is acting on information that the epidemic is worse than it appears.

“No economic data released over the last week would justify an unscheduled rate cut, let alone the largest rate cut since the financial crisis,” Sukholitsky said. “The proximate driver was the S&P 500, which experienced a correction, albeit one that was well within historical averages. Equities are now in the red because they sense inconsistency between this rate cut and the Fed’s statement that ‘fundamentals of the U.S. economy remain strong.'”

Ivan Pentchoukov and Tom Ozimek contributed to this report.

Follow Emel on Twitter: @mlakan