By Lindsay Dunsmuir
WASHINGTON (Reuters) – The U.S. Federal Reserve cut interest rates on Tuesday in a bid to shield the world’s largest economy from the impact of the coronavirus, though Fed Chair Jerome Powell suggested the threat to the economy would not soon abate.
“The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad, for some time,” Powell said in a news conference shortly after the central bank said it was cutting rates by a half percentage point to a target range of 1.00% to 1.25%.
The decision was unanimous among policymakers. It was the first emergency rate cut since 2008 at the height of the financial crisis, underscoring how grave the central bank views the fast-evolving situation.
The move did little to deliver immediate comfort to financial markets roiled by fears of the virus’ impact on economic growth. Losses on Wall Street deepened. Yields on U.S. Treasuries initially fell, though later perked up slightly.
The central bank’s action, Powell said, would provide “a meaningful boost to the economy” by loosening financial conditions and shoring up business and household confidence.
“We saw a risk to the outlook for the economy and chose to act,” Powell said, noting the impact on tourism and travel and on company supply chains. “I do know that the U.S. economy is strong…I fully expect that we will return to solid growth and a solid labor market as well.”
Still he acknowledged the outlook is uncertain and the situation “fluid.”
With 90,000 cases worldwide in 77 countries and territories, the virus has upended global supply chains, triggered cancellations of sports events, business meetings and other large gatherings, and torpedoed global stock prices on fears it could cause a recession.
“Normally, markets would welcome a rate cut, and they were hoping for it,” said Peter Kenny, Founder of Kenny’s Commentary LLC. “Now that we’ve got it, the question is what’s next?”
The Fed’s decision to cut interest rates before its scheduled policy meeting in two weeks reflects the urgency with which it feels it needs to act in order to prevent the possibility of a global recession, and opens the possibility that more action could come sooner than later.
Jerome Powell wearing a suit and tie: U.S. Federal Reserve Chairman Jerome Powell speaks in Washington© Reuters/KEVIN LAMARQUE U.S. Federal Reserve Chairman Jerome Powell speaks in Washington
Interest-rate futures markets after the Fed’s move were pricing in another quarter-point interest rate cut by June.
Central bank easing can lubricate credit markets and boost demand by lowering the cost of borrowing. But, Powell noted, it cannot repair disrupted global supply chains or convince people to fly, attend meetings or even go to school, especially if local governments or companies bar such activities.
“We do recognize that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain; we get that, we don’t think we have all the answers,” Powell said. Still, he said, it will help support “overall economic activity.”
Powell had earlier on Tuesday taken part in a conference call with the top finance authorities from the world’s seven largest advanced economies, which concluded with a statement that they would take all appropriate measures to support the global economy. At his news conference, Powell said the Fed was in active discussions with other central banks.
Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York, said he was “a little surprised” at the Fed’s announcement on Tuesday morning. “I thought you’d see something coordinated among central banks,” he said.
While it fell short of global coordination, the Fed has not been alone in responding in the last few days. Earlier on Tuesday, central banks in Australia and Malaysia cut rates and on Monday the Bank of Japan took steps to provide liquidity to stabilize financial markets there.
U.S. Treasury Secretary Steven Mnuchin applauded the Fed’s decision, saying it would help the U.S. economy. In a tweet after the Fed move, President Donald Trump called on the central bank to cut even more. “More easing and more cutting,” he said.