Fed Is Worried About A COVID-19 Financial Crisis: Cuts Interest Rates By A Half Percent, Stocks Crash Anyway

Fed Is Worried About A COVID-19 Financial Crisis: Cuts Interest Rates By A Half Percent, Stocks Crash Anyway

interest rates
The Fed cut interest rates by half a percentage point over economic anxiety and the coronavirus. It was the first such rate cut of its kind since the 2008 financial crisis. Stewardesses take temperatures of passengers as a preventive measure for the coronavirus on an Air China flight, Feb. 4, 2020. (AP Photo/Andy Wong)

The U.S. Federal Reserve announced today an emergency interest rate cut — the first of its kind since the 2008 financial crisis — cutting rates by half a percentage point in the face of economic anxiety over the coronavirus.

President Donald Trump has been pushing for a rate cut, worried about a slowdown in the U.S. economic expansion he takes credit for — and is counting on for re-election.

However, investors showed they are skeptical that rate cuts will be an effective tool against economic damage caused by the virus, Bloomberg reported. U.S. stocks rallied briefly after the surprise announcement, then the S&P 500 and Nasdaq Composite fell by at least 2.8 percent and the 10-year Treasury yield dropped close to 1 percent.

The Dow Jones Industrial Average traded 800 points lower, or 3 percent, after rising more than 300 points earlier in the day, CNBC reported. The 30-stock average gyrated between sharp gains and solid losses after the decision was announced.

“We saw a risk to the outlook of the economy and we chose to act,” Fed Chairman Jerome Powell told reporters in Washington, D.C. “The spread of the coronavirus has brought new challenges and risks.”

The Fed meets about eight times a year. This is the first time it has acted outside its normal cycle of meetings or cut interest rates by more than 25 basis points since 2008, shortly after the collapse of Lehman Brothers. U.S. central bankers are scheduled to meet March 17-18 in Washington, D.C.

The rate cut reduces the U.S. interest rate to less than 1.25 percent, down from about 1.75 percent. Fed leaders voted unanimously for the reduction, and Powell tried to project a sense of calm during the press conference, Washington Post reported. He said repeatedly that the U.S. economy still looks healthy, but that “sentiment” had changed. The cut briefly calmed investors but was short-lived. The stock market fell sharply after his remarks.

The rate decrease was not enough for Trump, who tweeted a demand 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.”

There are limits to what the Fed can do with interest rates already so low and a shock to the economy that is causing people to want to stay home, regardless of sales and cheap credit.

Fear of the coronavirus spreading have translated to empty grocery store shelves in parts of the country. Manufacturing supply chains are breaking down when parts don’t arrive from Asia. People are canceling flights, cruises, hotel stays and conferences. Stock market fluctuations could lead consumers to cut spending, the major driver of the U.S. economy.

The Fed’s typical wait-and-see approach has yielded to the fast-moving coronavirus. “The central bank felt it needed to act ahead of a widespread situation where workers and students are forced to stay home and the economy grinds to halt,” Washington Post reported.

Powell rejected the idea that the Fed is caving to Trump’s wishes. However, he left the door open for another rate cut at the next Fed meeting on March 17-18.

Chris Rupkey, chief financial economist at MUFG Union Bank, expressed doubts over how much a Fed cut could address damage from the coronavirus. The rate cut “looks rushed to us and not properly considered,” he said.

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“Moving between meetings with a bigger-than-normal interest rate cut looks like Fed officials are panicking as much as stock market investors did last week,” Rupkey told CNBC. “They did not need to be so aggressive and the Fed under Powell keeps responding wrongly in our view more to the financial markets than they are to the broader economy.”

Trump blamed it all on Powell, saying the Fed chairman had “called it wrong from day one.”

“Australia’s Central Bank cut interest rates and stated it will most likely further ease in order to make up for China’s coronavirus situation and slowdown…Other countries are doing the same thing, if not more so. Our Federal Reserve has us paying higher rates than many others, when we should be paying less,” Trump said.