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Montevideo, October 25th 2020 - 08:47 UTC

 

 

Fed emergency intervention to address potential economic toll of the coronavirus outbreak

Wednesday, March 4th 2020 - 06:58 UTC
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The FOMC, which sets Fed interest rates, announced it would cut its baseline rate range by 0.5 percentage points to a 1 to 1.25 percent spread. The FOMC, which sets Fed interest rates, announced it would cut its baseline rate range by 0.5 percentage points to a 1 to 1.25 percent spread.

The Federal Reserve on Tuesday cut interest rates amid concern about the potential economic toll of the coronavirus outbreak. The Federal Open Market Committee (FOMC), which sets Fed interest rates, announced it would cut its baseline rate range by 0.5 percentage points to a 1 to 1.25 percent spread.

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” the FOMC said Tuesday in a statement. “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 Fed's emergency cut is the first rate reduction issued in between FOMC meetings, where the moves are usually announced, since 2008. Investors had bet on the Fed to cut rates by 0.5 percentage points by the end of the upcoming FOMC meeting from March 17 to 18.

The Fed was under growing pressure from financial markets to cut rates after U.S. stocks plunged into a correction last week. While stocks rallied Monday, the full extent of the coronavirus’s economic damage is unknown, raising the risk of a recession.

”The virus and the measures that are being taken to contain it will surely weigh on economic activity both here and abroad for some time,“ Fed Chairman Jerome Powell said in a Tuesday press conference, citing the early toll of the disease on the travel, tourism and manufacturing industries.

”In response, we have eased the stance of monetary policy to provide some more support to the economy,“ he said.

Even so, analysts have questioned whether a Fed rate cut could help negate the damage of widespread supply disruption caused by the outbreak and unique panic stirred by a health scare.

”We do recognize that rate cut will not reduce the rate of infection, it won't fix a broken supply chain. We get that,“ Powell said on Tuesday.

”We don't think we have all the answers, but we do believe that our action will provide a meaningful boost to the economy,“ he continued.

Powell said that while health policies are the ultimate solution to the economic risks driven by the coronavirus, a rate cut will ”avoid a tightening of financial conditions, which can weigh on activity, and it will help boost household and business confidence.“

President Trump had also boosted his long-running pressure on the Fed and Powell to cut interest rates amid the growing anxiety about the stock market's steady dive and the potential harm to an otherwise resilient U.S. economy.

Trump called on the Fed to slash rates even further in a tweet shortly after the bank announced the emergency cut.

”The Federal Reserve is cutting 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!“ he tweeted.

Powell rebuffed questions on Tuesday about Trump's influence on the Fed's decision, insisting the bank will never act on ”political considerations“ and only on the ”best research“ and ”best thinking we have.“

”We're always going to make our decisions in the interest of the American people to carry forward and try to achieve the mandates that Congress has given us,“ Powell said. ”It's very important that the public understand that.”

The FOMC statement:

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 by 1/2 percentage point, to 1 to 1 1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

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