Federal Reserve Emergency Rate Cut

In an attempt to insulate the US economy from the novel coronavirus pandemic, the Federal Reserve announced an emergency rate cut on Tuesday. Through the rate cut, the Feds slashed market interest rates by half a percentage. It has since become the first emergency rate cut since the 2008 financial crisis, also making it the biggest one-time cut since 2008.  There is no doubt that the coronavirus outbreak poses great threat to the economy and to this, the Fed stated in a statement, “In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.”

Backing up the sudden decision of the emergency rate cut, Jerome Powell, Fed chairman said in a conference on Tuesday, “We saw the risk to the outlook to the economy and chose to act.” To this, he also added that the financial markets still functioned normally and the economy continues to thrive. He also said that he has an expectation that the US economy would fully recover once the outbreak is contained. This he said, “I don’t think anybody knows how long it will be… 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.”

The rate cut may not directly solve the coronavirus pandemic issue nor amend broken supply chains, one this is certain— “it will help boost household and business confidence,” Powell added. To support this statement, Solita Marcelli, deputy chief investment officer for the Americas at the UBS Global Wealth Management said that, “what it does more than anything else is it improves sentiment and buys time for fiscal authorities to figure out the response to the economic consequences of the virus.” Following the rate cut, the new benchmark interest rate is between 1% and 1.25%. Many countries including the US have the novel coronavirus pandemic under control as well as global economies. The US central bank, in a statement, said that the fundamentals of the US economy remain strong, however, “the coronavirus poses evolving risks to economic activity.” Therefore, no stone remains unturned in dealing with the coronavirus economic impact.

President Trump and a few others are doubtful that the rate cut would be enough, hence, other rate cuts may follow. Marcelli also supported this thought by saying, “They need the support of fiscal measures. I don’t think alone on its own the [rate cut] is going to be able to uplift the negative economic impact.” Some experts are certain that the Feds will announce another rate cut at its next meeting on March 17/18. Wall Street is also optimistic that the rate cut may eventually be zero by the end of the year.

There are still quite a few uncertainties as to the total impact the coronavirus pandemic may have on the US economy as industries such as travel and leisure are greatly feeling the impact. These industries have reported an increasing number of losses to their business.

The G7 officials and International Monetary Fund have both made unspecified commitments toward helping other countries’ economies that have been impacted by the novel coronavirus.