The Federal Reserve slashed interest rates Tuesday in an extraordinary attempt to contain economic fallout from the novel coronavirus, with policymakers voting unanimously for their biggest single cut — and first emergency rate move — since the depths of the 2008 financial crisis.
“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,” Jerome H. Powell, the Fed chairman, said at a news conference in Washington after the announcement. “The situation remains a fluid one.”
Stocks in the United States spiked only temporarily after the rate cut, as worries about the Fed’s impotence in the face of coronavirus economic risks fueled a market sell-off. Treasuries also surged, pushing the yield on the benchmark 10-year Treasury note below 1% for the first time in history, as investors continued their flight to safe investments.
Rates are now set in a 1% to 1.25% range, and Powell signaled a willingness to do more if needed. While Powell and his colleagues “like our current policy stance,” they are “prepared to use our tools and act appropriately, depending on the flow of events.”
Investors, increasingly nervous that the fallout could dramatically slow growth or even prompt a global recession, looked to central banks, particularly the Fed, to respond decisively to the building threat. Investors expect further rate cuts, and some economists suggested markets had been looking for the Fed to do even more. But investors might also be worried that the central bank is left with little room to avert coming damage from the virus, which has already closed schools, curtailed travel and prompted companies to reduce growth forecasts.
“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 research firm MacroPolicy Perspectives, said. “We don’t know where it is, who has it or how far it is going to spread.”
This cut leaves the Fed with limited room to lower rates further should the economy run into danger. Going into the last recession, from 2007 to 2009, the Fed cut rates from above 5%. Now it will have just four quarter-point moves left at its disposal.
Other economists speculated that markets might have seen the action as a signal that economic fundamentals are crumbling.
“This could be seen as a panic move,” Ryan Sweet at Moody’s Analytics said in a note, calling the Fed’s decision to move in between scheduled meetings “risky.”
The emergency reduction underlines the fraught moment economic policymakers currently face. Coronavirus has torn across the globe, sickening about 90,000 people. While the vast majority of those cases are in China, where the infections first surfaced, major outbreaks have also taken hold in South Korea, Japan, Iran and Italy, and cases are climbing in other countries.
Many economists predict that the United States could face a dramatic slowdown — or even recession — if efforts to contain the spread of the virus fail. Preventive measures could scare consumers away from shopping malls, movie theaters and restaurants, kicking the legs out from underneath the household spending that has powered America’s record-long expansion.
Emergency rate cuts are not without precedent. The Fed’s move Tuesday echoed a 50-basis-point rate cut it made in October 2008 as markets melted down in the wake of the collapse of Lehman Bros. and another it made earlier that year.
But this time, the central bank moved preemptively — trying to get ahead of the economic problem, rather than waiting until the damage was more fully realized. Unemployment in the United States remains at a 50-year low, and most economic indicators do not yet reflect virus fallout. As recently as late January, the Fed signaled it expected to hold rates steady, with no plans to raise or lower borrowing costs after ushering in three cuts in 2019. But officials were already growing concerned about the virus’s potential effect at its last policy meeting, and in February, Powell warned that China’s struggles with the virus could pose broader economic risks.
The Fed’s move came after central banks in Australia and Malaysia lowered borrowing costs early Tuesday.
But there are limits to what rate cuts can do to contain the damage. While they can bolster confidence and help to keep borrowing cheap, central banks cannot prevent disease from spreading or mend broken supply chains amid factory delays.
The Fed’s move “can provide a short-term floor under sentiment, which is what they’ve done today,” Neil Dutta, head of economic research at Renaissance Macro Research, wrote in a note after the announcement. “But the Fed’s tools are imperfect and not adequate to deal with a public health crisis.”
Dutta added that “the panic needs to come from the opposite of 17th Street” — which is where the White House is.
President Donald Trump, who has no control over monetary policy, has been urging the Fed to lower interest rates, saying the United States should have the lowest borrowing costs. But the Fed’s half-point cut did little to assuage his complaints. After the cut was announced, Trump told reporters that “the rate is too high. It should be eased down so we’re competitive,” adding, “We should have the low rate. But we have a Fed that doesn’t agree with that. I disagree with them.”
Asked if the Fed felt political pressure to cut, Powell said that in making decisions, he and his colleagues are “never going to consider any political considerations whatsoever.”
For now, the White House seems unconvinced other measures will be necessary. Speaking before the House Committee on Ways and Means, Treasury Secretary Steven Mnuchin insisted that the current volatility was not comparable to the 2008 financial crisis and that the disruptions to travel and supply chains would abate. However, he made clear that the Trump administration is preparing for the economy to take a hit this year.
“I would say this is not different than any severe situation,” Mnuchin said. “This is going to have an impact on the short term in the economy.”
Treasury has created a task force to develop stimulus proposals, should additional efforts be needed, he said, adding that he was looking at ways to help businesses if they need support. A White House official said that Trump would also likely support infrastructure investment as part of a stimulus package.
In a joint statement earlier Tuesday, leaders of the Group of 7 — which also includes Britain, Canada, France, Germany, Italy and Japan — pledged global coordination and cooperation in containing fallout from the coronavirus but fell short of committing to concrete action.
Global finance ministers and central bankers said they were “closely monitoring the spread of the coronavirus disease” and reaffirmed their “commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”
But the European Central Bank and the Bank of Japan already have negative interest rates, leaving them with limited room to act to offset any crisis — and placing more onus on fiscal policy.
The lack of global policy space — and a building sense of government inaction at home — leaves more pressure on Powell and his colleagues.
“The Fed is carrying the burden for everyone else out of ammunition globally, and for the lack of an effective fiscal response,” Coronado said.