Fed slashes interest rates to inoculate economy from coronavirus
The Federal Reserve on Tuesday lowered its benchmark interest rate by a half-point, the largest cut since 2008, in a move to offset the impact of the coronavirus on the U.S. economy.
“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” the central bank said in a statement, noting it “is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”
The Fed’s benchmark rate is now in a range between 1% and 1.25%, about where the rate was in the summer of 2017.
“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,” Paul Ashworth, chief U.S. economist with Capital Economics, told investors in a report.
It was the Fed’s first move to lower borrowing costs since last year, when it reduced its key short-term rate three times. It is also the first time the central bank has cut its key rate between policy meetings since the 2008 financial crisis.
Stocks, which plunged last week amid mounting concerns about the potential economic fallout from the coronavirus, shot up immediately after the rate cut. The Dow rose as high as 300 points above where it closed on Monday. But the enthusiasm quickly wore off. Within a half hour, the stock market had lost much of those gains, and continueed to whipsaw between gains and losses through the morning.
The Fed cut could signal that policy makers are more worried about the coronavirus’ damage to the U.S. economy than investors had expected.
“[T]his is a welcome move,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note. “It won’t prevent the economy slowing if the Covid-19 virus takes hold in the U.S., but it will ease the cost of working capital for businesses if demand falters or supply chains lengthen, and it signals to markets that the Fed has their backs.”
President Donald Trump, a frequent critic of Fed Chairman Jerome Powell, tweeted early Tuesday that the bank was not lowering interest rates fast enough. Hours later, the Fed announced its move, but that wasn’t enough for Mr. Trump.
“More easing and cutting!,” the president tweeted around 10:45 a.m.