The Federal Reserve slashed interest rates by half a percentage point in the first such emergency move since the 2008 financial crisis, amid mounting concern that the coronavirus outbreak threatens to slow or stall the record US economic expansion.
“My colleagues and I took this action to help the US economy keep strong in the face of new risks to the economic outlook,” Fed Chairman Jerome Powell told a hastily convened press conference in Washington on Tuesday. “The spread of the coronavirus has brought new challenges and risks.”
But in a sign of how sceptical investors are that rate cuts will be an effective tool in combatting the economic damage caused by the virus, US stocks only rallied briefly after the surprise announcement.
The S&P 500 index fell as much as 2.0 per cent following Powell’s remarks before paring losses while the 10-year Treasury yield plunged toward 1.0 per cent. Fed funds futures are pricing in roughly a total of a percentage point of easing this year.
The central bank said in its statement that it was “closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy”.
Powell, in response to a reporter’s question about the scope for further moves, said “we do like our current policy stance”, before repeating the Fed’s reference to taking action if needed.
The Fed’s decision could presage a wave of easing from other central banks around the world, although those in the euro-area and Japan have less scope to follow with rates already in negative territory.
It came hours after Powell and finance chiefs from the Group of Seven nations said they would “use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks”.
The vote for the rate cut to a range of 1.0 per cent to 1.25 per cent was unanimous. The Fed also said in the statement that the “fundamentals of the US economy remain strong”.
The Fed move followed public pressure for a cut by President Donald Trump, whose stewardship of the economy is central to his re-election campaign this year.
After today’s shift he called for more, demanding in a tweet that the Fed “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.”