Interest Rates Cut to Deal with Coronavirus

 

On Tuesday, March 3rd, the US Federal Reserve cut interest rates to protect the economy from the impact of the coronavirus. However, it appears that the markets are not rallying quickly amid concerns over a more permanent slowdown. In answer to their concerns, the Chair of the Federal Reserve, Jerome Powell, stated that he believes the US economy is strong. Although, he stated, it’s hard not to admit that the coronavirus could still cast a burden on economic activity globally and in the United States going forward.


Fed policymakers were unanimous in their decision to slash rates by a half percentage point with the targeted range at 1 to 1.25%. This is the first rate cut since 2008 that has happened beyond a regular policymaker meeting. Back then, the financial crisis was at its height. That probably illustrates how serious the condition currently is.


Fed Still Expects Strong Growth from the Economy

 

But Powell maintains that even though it is time to take measures to support the economy, we could return to a robust labor market and strong growth. But the fluidity of the situation is something Powell could not deny. All the major stock market indexes in the US closed almost 3% lower on Tuesday. The 10-year US Treasury note yield dropped lower than 1% for the first time ever.


It seem strange that going back a few weeks ago, Fed officials expected only temporary effects of the coronavirus on the economy and were satisfied with the three rate cuts in 2019. They believed back then that the economy was strong enough to deal with any shocks.


Fluidity of the Situation Causes Unpredictability

 

But with the above-mentioned fluid nature of the situation, things keep changing by the day. It all depends on how the Fed sees the situation. If it believes the chances of a recession are high, the rate cutting could aggressively continue.


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