It was the first unscheduled, emergency rate cut since 2008, and it also marks the biggest one-time cut since then. The new benchmark interest rate is a range of between 1% and 1.25%.
Fed Chairman Jerome Powell echoed this sentiment during his subsequent press conference Tuesday.
“We saw the risk to the outlook to the economy and chose to act,” Powell said, adding that the financial markets are functioning normally, the economy continues to perform well, and that he expects the United States to fully recover after the outbreak ends.
The emergency rate cut came as somewhat of a surprise: Although the stock market soared Monday in expectation of a rate cut (the market predicted a 100% chance of a cut in March), the Fed and other central banks had seemingly pooh-poohed the notion as recently as Tuesday morning.
“I don’t think anybody knows how long it will be,” Powell said, referring to the potential economic damage coronavirus could cause. “I know the US economy is strong and we’ll get to the other side of this and return to solid growth and a solid labor market as well.”
Although a rate cut won’t cure infections or fix broken supply chains, “it will help boost household and business confidence,” Powell noted.
The potential damage to the US economy is still an unknown: Powell said any coronavirus-related slowdown would be in a very early stage, although many industries, such as travel and leisure are already reporting losses to their businesses.
Coronavirus confusion
The Fed chairman on Tuesday explained the change of heart was because of the continued spread of the disease and a risk to America’s economic outlook.
Economists are worried about the effect the outbreak will have on global supply chains, trade and consumer spending. The latter is the backbone of the US economy.
With respect to coordinated action of multiple central banks, Powell noted that it’s up to individual banks to determine whether they will act, too, as the United States just did. But he hinted further rate cuts from international central banks could be on the way. The Reserve Bank of Australia slashed rates by a quarter-percentage point on Tuesday.
“It’s possible you’ll see more individual action — more action moving forward,” Powell said.
“With financial markets in turmoil and evidence growing that the coronavirus is developing into a pandemic, the Fed’s change of heart is entirely understandable, wrote Paul Ashworth, chief US economist at Capital Economics.
President Donald Trump, who has long advocated for lower rates, cheered the rate cut but said the Fed needed to cut further.
Source : CNN