The U.S. Federal Reserve cut interest rates by a half percentage point due to coronavirus

DORAL, FL – The U.S. Federal Reserve announced in a statement this Tuesday that it was cutting interest rates by a half percentage point to a target range of 1.00% to 1.25%.

According to Reuters, the central bank did this move to “shield the world’s largest economy from the impact of the coronavirus“. 

The action was considered by Federal Reserve Chair, Jerome Powell, “a meaningful boost to the economy” taking into consideration that the outbreak has spread in 77 countries and territories causing cancellations of sports events, business meetings and other large gatherings, as well as an impact in global stock prices. 

This is the first emergency rate cut since 2008 at the height of the financial crisis. With this, the entity sets a position of how serious the coronavirus is evolving. This decision was also made due to the urgency of preventing a global recession. 

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. 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,” the U.S. Federal Reserve said in a statement.

“We saw a risk to the outlook for the economy and chose to act,” Powell said. “I fully expect that we will return to solid growth and a solid labor market as well.”

U.S. stocks initially surged on the move, which had increasingly been expected as it became evident the coronavirus would not be contained to its epicenter in China.

However, equities reversed many of their initial gains within minutes of the unscheduled announcement by the Federal Open Market Committee, the central bank’s policy arm.

The U.S. Federal Reserve decision also came with an increase in the U.S. Treasury debt prices, sending bond yields lower. Interest-rate futures traders immediately began pricing in even more rate cuts in coming months.

“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.”

In the light of the questions this decision left, Powell said on a conference that the organization would take all appropriate measures to support the economy after discussing with top finance authorities from the worlds’s seven largest economies and other central banks. 

“I’m a little surprised. I didn’t expect that at 10 o’clock today, I thought you’d see something coordinated among central banks,” said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York to Reuters. 

U.S. Treasury Secretary Steven Mnuchin was happy with the Fed’s decision, because for him this would help the U.S. economy.

Donald Trump, in the other hand, expressed his view about the topic in a tweet, calling on the central bank to cut even more. “More easing and more cutting,” said the President. 

 

Picture by: REUTERS/Kevin Lamarque

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