The Federal Reserve cut its main policy rate by a half a percentage point on Tuesday, responding to “evolving risks” from the spread of the coronavirus.
“The fundamentals of the US economy remain strong,” according to a unanimous statement by the Fed’s Open Market Committee. “However, the coronavirus poses evolving risks to economic activity.”
The committee repeated its language from its Friday statement that it is “closely monitoring” developments and will “act as appropriate to support the economy”.
Fed chair Jay Powell will hold a press conference at 11am local time.
Stocks gyrated following the Fed’s move, which will set its policy rate at 1 to 1.25 per cent. The S&P 500 was up 0.14 per cent nearly an half-hour after the announcement, while the Nasdaq Composite was flat.
Treasuries rallied after the announcement. The yield on the policy-sensitive two-year note fell 13 bps to 0.78 per cent. Meanwhile, the 10-year yield slipped 7 bps to 1.09 per cent. Yields fall when prices rise.
Bank of America, considered the most rate-sensitive of the big US banks, fell 3.3 per cent after the cut. Smaller banks and less diversified lenders fared worse: tech company lender Silicon Valley Bank fell 5.5 per cent
“Given the Fed has little firepower left they went early,” said Alicia Levine, chief market strategist for BNY Mellon Investment Management. “The cuts will stabilise sentiment.”
Donald Trump, who has made a strong economy and financial markets a cornerstone of his re-election campaign, had been ratcheting up pressure on the Fed to cut interest rates as stocks slumped in response to the virus’s spread.
After the Fed’s announcement, he tweeted: “The Federal Reserve is cuting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!”
On Tuesday morning before markets opened in the US, the finance ministers and central bank governors of the G7 had released a statement reaffirming their “commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”
The Fed is the first central bank to follow the announcement with concrete action. The Bank of England had earlier signalled it was in no hurry to cut rates to address any economic fallout before its next scheduled meeting, although it did not rule out such a move.
Giving evidence to the Treasury Committee earlier on Tuesday, BoE governor Mark Carney said communications lines were open between central banks but stressed that “across jurisdictions there’ll be some differences in the exact form and timing of those measures”.
The Fed’s move on Tuesday “raises the question whether they know something the market doesn’t know,” said Torsten Slok, chief economist at Deutsche Bank Securities. “We literally have no economic data to hang our hat on yet. They certainly don’t want to be blamed for being behind the curve.”
Mr Slok added that the time between signalling a rate cut and actually cutting was “extremely short.”
The Fed foreshadowed a possible cut on Friday, in a rare statement outside of a scheduled meeting. In its statement, the Fed had included the phrase “act as appropriate,” one it has used in the past to signal an intention to cut.
As recently as last week, investors had seen no chance at all of any cuts at the Fed’s next meeting on March 18, according to an analysis of short-term interest rate futures by the CME Group. By Monday, that likelihood had risen to 100 per cent as short-term interest rates went into freefall.
“Given the wording on the economy that accompanied the emergency action, there is a real worry unfortunately that the 50 basis point cut will be viewed not only as the markets again forcing the hand of the Fed but also as yet another communication slippage on the part of the Federal Reserve,” said Mohamed El-Erian, chief economic adviser at Allianz.
“It makes it even more important that this action be framed in the context of a co-ordinated global policy effort and not just a correlated one,” he added.
As evidence of the spread of the coronavirus grew in the US, some analysts wondered the blunt instrument of monetary policy was the best response to the economic fallout of a potential pandemic.
“The Fed obviously views this as a potentially substantial demand shock to the economy and wants to get ahead of the damage if possible,” said Tim Duy, a monetary economist at the University of Oregon. “The risks to early and large movement are minimal in a low-inflation environment. The Fed remains focused like a laser on preventing a recession.”
Additional reporting by Richard Henderson and Jennifer Ablan in New York and Chris Giles in London