Fed cuts interest rates by half percentage point in rare inter-meeting move
The Federal Reserve, in a rare inter-meeting move, on Tuesday cut its benchmark interest rate to counter the threat to the economy from the coronavirus epidemic.
In a statement, the Fed said it cut its fed funds target rate by a half percentage point to a range of 1%-1.25%.
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” the statement said.
At a press conference later, Fed Chairman Jerome Powell said officials saw the virus spreading and this represented a material change in the outlook for economic growth.
“We’ve come to the view now that it is time to act in support of the economy. Once we reached that decision, we decided to go ahead,” Powell said.
Later, he said the Fed does believe “that our action will provide a meaningful boost to the economy.”
Stocks initially rallied after the Fed announcement but then fell back. The Dow Jones Industrial Average DJIA, -1.78% was down 314 points in late morning trading.
Powell said it was too soon to say how long the any economic slowdown from the disease would last.
“I don’t think anybody knows how long it will be. I do know the U.S. economy is strong and we will get to the other side of this,” he said.
The Fed decision, which was unanimous, came shortly after G-7 finance ministers and central bankers promised to use all available tools to battle the slowdown caused by the disease.
Analysts were disappointed the G-7 did not list any concrete steps to be taken, but Powell said more action might be in the offing.
“It is possible there would some more formal coordination as we move forward,” Powell said.
Economists have been calling on the Fed to cut rates after U.S. stocks last week saw the sharpest sell-off since the 2008 financial crisis. The yield on the 10-year Treasury note TMUBMUSD10Y, -11.25% also tumbled over the past eight days and fell to a new record low Tuesday around 1.03%.
Analysts said an interest rate cut might help stabilize financial markets, but fiscal policy measures would be better suited to help economies hit by the coronavirus.
Powell said the Fed understood that a rate cut would not reduce the rate of infection, or fix a supply chain. “We don’t have all the answers,” he said.
However, the rate cut would support the economy by easing financial conditions and help boost household and business confidence, he said.
Eric Winograd, senior economist at AB, said he thought the Fed would lower rates again in two weeks at its March 17-18 meeting.
“If the Fed is worried enough to cut 50 today, I expect them to cut more at their March 18 meeting,” Winograd said.
President Donald Trump tweeted that the Fed half-point cut was not enough.
Asked about Trump’s comments, Powell said the Fed did not consider politics in making its decision.
Carl Weinberg, chief economist at High Frequency Economics, said he thought other central banks may follow the Fed with their own policy moves. He said a rate cut tomorrow by the Bank of Canada now seems a near certainty.
The last time the Fed cut interest rates on an emergency basis between its regular policy meetings was on October 8, 2008.