Fed’s Surprise Rate Cut Fails to Calm Markets

Tuesday’s rate cut lowered the fed funds rate to a range between 1% and 1.25%. It was the first cut to occur between a regularly scheduled Fed policymaking meeting and followed an aggressive rate cut by Australia’s central bank. The next Fed policy meeting is set for March 17-18.

In its statement the Fed noted that “the fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.” The Fed added that it is “closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

The Fed’s rate cut follows a warning by the OECD on Monday that the coronavirus’ spread would slash economic growth in the global economy and governments should act immediately to address the impact.

It also follows a morning teleconference with G-7 financial ministers and central bank governors led by Fed Chairman Jerome Powell and U.S. Treasury Secretary Steven Mnuchin that ended with a statement affirming their coordinated commitment “to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”

When asked at his mid-morning news conference whether the Fed’s rate cut was part of a coordinated effort with other central banks, Powell said that each bank and each national government were setting their own monetary and fiscal policies but that the Fed was continuing active discussions with other central banks on an ongoing basis. It’s possible there will be  “more formal coordination as we move forward,” he said.

He explained that U.S. economic fundamentals remain strong but the coronavirus has “materially” changed the risks to the U.S. economic outlook. “The magnitude and persistence” of the virus and its “overall effect on the economy remains highly uncertain and the situation remains a fluid one,” said Powell.

The spread of the coronavirus requires a “multifaceted response” from health care experts, fiscal authorities if determined appropriate and from the public and private sectors, said Powell, adding that monetary policy plays a role, too, supporting the overall economy. It “won’t reduce the spread of infection or fix a broken supply chain,” but can provide a “meaningful boost to the economy” and to avoid tight financial conditions, he said.

Carl Weinberg, chief economist, and Rubeela Farooqi, chief U.S. economist, of High Frequency Economics aren’t so sure. In their morning note, they wrote they don’t believe “that cutting interest rates is at all constructive in resolving the supply shock induced by the coronavirus outbreak and the policy responses to it…. “A Fed rate cut was expected in the markets, but no one expected it today.”