The U.S. Federal Reserve did a monetary about-turn on Tuesday in response to the coronavirus outbreak, announcing an emergency cut in the benchmark interest rate to preempt a sharp downturn in the economy.
As recently as late January, the Fed had signaled it had no plans to raise or lower borrowing costs after ushering in three cuts in 2019. But that position was no longer tenable amid concerns that economic growth is at risk from the coronavirus.
“We saw a risk to the outlook of the economy and we chose to act,” Fed Chair Jerome Powell said Tuesday in announcing the central bank had decided to cut its benchmark federal funds rate by half a point to a range of 1% to 1.25%.
It was the first such emergency move since the Fed cut rates by the same amount in October 2008 as markets melted down in the wake of the collapse of Lehman Brothers.
The markets have been similarly roiled by the coronavirus. On Tuesday, Wall Street stocks spiked more than 1% immediately after the Fed’s announcement before turning lower, possibly indicating investors are concerned the Fed has little leeway — with interest rates already so low — to avert coming damage from the virus.
“Maybe there’s a stronger sense that we’re closer to being out of ammo — this is a real shock, and what is a rate cut going to do,” Julia Coronado, founder of the research firm MacroPolicy Perspectives, told The New York Times.
Powell himself acknowledged there are limitations to what the Fed can do. “We don’t think we have all the answers, but we do believe our action will provide meaningful support to the economy,” he told reporters.
The Fed chair left the door open to another rate cut when Fed leaders have their regularly scheduled meeting later this month but he stopped far short of promising action.
Treasury Secretary Steven Mnuchin praised the rate cut, saying the Fed “did the right thing getting ahead of this.” But President Donald Trump tweeted that the Fed “must further ease and, most importantly, come into line with other countries/competitors.”