US slashes interest rate over coronavirus – first emergency cut in years
The US central bank has cut interest rates in an emergency move to help shield its economy from the impact of the “evolving” coronavirus crisis.
The Federal Reserve, which had hinted that support was imminent following steep stock market falls last week, said it was taking half a percentage point off its federal funds rate to a new target range of 1% to 1.25%.
Sky’s economics editor Ed Conway suggested that the measure could prompt other central banks to follow suit as worries grow that efforts to contain the outbreak will cripple global growth this year.
Countless economists now predicting the @bankofengland will cut interest rates to 0.5%. Only thing they can’t decide is whether it’ll be before or at their meeting near the end of March
— Ed Conway (@EdConwaySky) March 3, 2020
The Fed was not due to meet, let alone make a decision on rates, for a fortnight.
The last time it cut rates between meetings was in 2008 – at the height of the financial crisis.
The surprise announcement helped stock markets in the US and Europe pile on value that was lost during the panic of last week initially, though caution later set in on Wall Street as the benefits of the cut for the economy were seen as negligible.
Financial analysts suggested the market reaction reflected doubts that a rate cut would boost demand in an environment of government-inspired restrictions to halt the spread of a virus.
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Returns yielded by 10-year US bonds – parcels of government debt – fell below 1% for the first time ever.
That reflected growing concern the US could fall into recession in any protracted virus-led slowdown.
Just 24 hours previously, President Donald Trump had demanded the bank have the “lowest rate”.
He tweeted in reaction to the rate cut: “The Federal Reserve is cuting (sic) but must further ease and, most importantly, come into line with other countries/competitors.
“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 central bank’s rate-setting committee announced its measure hours after the governor of the Bank of England, Mark Carney, told MPs in the UK the economic shock from the spread of COVID-19 “could prove large”.
Its monetary policy committee is not due to announce its next interest rate decision until 26th March, by which time Mr Carney will have handed over to his successor Andrew Bailey.
Rate cuts during times of potential economic shocks are designed to lower borrowing costs across the economy – supporting economic activity in the process.
Fed chairman Jay Powell told reporters that the speed of COVID-19’s spread prompted its action.
The Fed’s statement said: “The fundamentals of the US economy remain strong.
“However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee (FOMC) decided today to lower the target range for the federal funds rate.”
In addition to the central bank support, the US Treasury Secretary Steve Mnuchin said the government was looking at options to support businesses through COVID-19 disruption.
The knock-on effects have hit factory output, especially in the manufacturing powerhouse of China, as part of efforts to limit contagion through restrictions on the movement of people.
In an acknowledgement of COVID-19 concerns, it was also announced that the International Monetary Fund (IMF)/World Bank Spring Meetings in mid-April would be adapted to a “virtual format”.
A joint statement said: “Our goal is to serve our membership effectively while ensuring the health and safety of Spring Meetings participants and staff.”
The Dow Jones Industrial Average overturned early losses to register a gain of more than 1% after the Fed’s statement was released, but it later turned negative and was almost 3% lower at the closing bell.
Gains the FTSE 100 had made in London were limited late on as it closed the session just shy of 1% higher.
The pound also clawed back 0.5% of strength from a weakening US dollar.
Neil Wilson, chief market analyst at Markets.com, said the FOMC’s move could also be seen as conflicting in its message.
“The Fed will take the usual flak for saying on the one hand that the economy is sound but aggressively cutting rates simply because financial markets are out of kilter for a bit,” he wrote.
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