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Fed cuts rates by 50 basis points amid coronavirus concerns

·4 min read

The Federal Reserve cut interest rates by 50 basis points in an impromptu meeting on Tuesday as a response to the coronavirus.

The cut, which amounts to a half percentage point, lowered the current target range to between 1% and 1.25%. The decision was unanimous among the Federal Open Market Committee members. U.S. stocks fluctuated after the emergency rate cut on Tuesday.

‘Evolving risks to economic activity’

In a statement, the Fed said the “fundamentals of the U.S. economy remain strong” but that the coronavirus “poses evolving risks to economic activity.”

Fed Chairman Jerome Powell said in a press conference that the Fed had judged the spread of the coronavirus to be a “material change” to the Fed’s economic outlook, thus justifying the rate cut.

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“Of course, the ultimate solutions to this challenge will come from others, particularly health professionals,” Powell said. “We can and will do our part, however, to help keep the U.S. economy strong as we meet this challenge.”

Federal Reserve Chair Jerome Powell holds a news conference following the Federal Open Market Committee meeting in Washington, U.S., December 11, 2019. REUTERS/Joshua Roberts
Federal Reserve Chair Jerome Powell holds a news conference following the Federal Open Market Committee meeting in Washington, U.S., December 11, 2019. REUTERS/Joshua Roberts

But Powell cautioned that the Fed’s role is not to judge the epidemiology of the coronavirus, but rather to insulate the U.S. economy from a shock.

“We will get to the other side of this,” Powell said. “And I fully expect that it will return to solid growth and a solid labor market as well.”

The FOMC made the announcement at 10 a.m. ET, two weeks before policy-makers were scheduled to meet (March 18). Powell’s press conference took place at 11 a.m. ET.

The 50 basis point cut Tuesday was the first maneuver on rates outside of a scheduled policy-setting meeting since Oct. 8, 2008, following the collapse of Lehman Brothers.

‘Use our tools’

Tuesday’s emergency cut occurred hours after Powell and Treasury Secretary Steven Mnuchin joined other G7 central bankers and finance ministers to discuss a coordinated response to the virus spreading.

Credit: David Foster/Yahoo Finance
Credit: David Foster/Yahoo Finance

The G7 readout committed the member countries to “closely monitoring the spread” of the virus and said policymakers would “stand ready to cooperate further on timely and effective measures.”

The Fed chair said Tuesday that it is “possible there will be some formal coordination” with other central banks in the future.

The central bank had not previously messaged an inclination to call an emergency meeting and cut rates. Ninety minutes before the closing bell on Friday, Powell issued a statement saying that the Fed would “use our tools and act as appropriate to support the economy.”

Last week, as markets saw a vicious sell-off in equities, Fed officials insisted that they had not yet seen the coronavirus as rising to a level of a “material change” in their outlook. Fed Vice Chairman Richard Clarida said last Tuesday it was “still too soon” to judge the impact of the virus.

Powell said in the press conference on Tuesday that the U.S. economy continues to look “strong” but said the 50 basis points of easing will not be enough on its own.

“I think it's up to individual countries, individual fiscal policies and individual central banks to do what they are going to do,” Powell said.

Powell declined to offer specific proposals for fiscal policies that would help. Reuters reported shortly after the Fed announcement that the U.S. was not considering suspending China in response to the coronavirus.

Powell acknowledged that rate cuts would not stop the spread of the coronavirus but were aimed at easing financial conditions.

“We get that, we don’t think we have all the answers,” Powell said.

The Fed’s next meeting is scheduled for March 18.

Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.

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