In a not-so-surprise move, the U.S. Federal Reserve cut interest rates by 0.50% as investor concerns grow given the global spread of the deadly coronavirus. The cut comes right on the heels of an emergency meeting with finance ministers and central bankers of the G-7 countries this morning. Following the meeting, the G-7 issued a statement calling for a coordinated fiscal and monetary response to combating an ensuing economic slowdown that threatens to plunge developed economies into a recession.
U.S. markets rose on news of the interest rate cuts, but quickly gave up those gains as investors’ doubts about the effectiveness of monetary policy to combat the economic spillover of the coronavirus resurfaced. My midday, the DJIA fell 600 points or 2% lower. The yield on the 10-year U.S. Treasury, which has been in decline for a week, nearly broke 1% for the first time ever.
As policymakers and global investors try to handicap the short- and long-term impact of the coronavirus on the economy, there are few tools at their disposal. While cutting rates lowers the cost of borrowing and servicing debt, monetary policy may not be enough to tackle the unforeseen consequences of what could turn into a global pandemic.
Investors have been experiencing historic volatility in the global markets for over a week, which saw major global indexes fall into a correction and then stage a historic rally on Monday on hopes of central bank intervention. Australia’s central bank cut interest rates to historic lows this morning, and the U.S. Federal Reserve was expected to follow at its next meeting on March 18th. But Fed officials decided to act immediately. In lowering rates, the Fed said that the U.S. economy remained strong, but the risks of the impact of the virus were too big to ignore.
The statement reads as follows:
“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.”
