Skip to main content

Fed Rate Cut Signals Seriousness of Outbreak’s Economic Threat

Federal Reserve chairman Jerome Powell cut the Fed Funds rate by 50 basis points Tuesday, signaling weakness in the U.S. and leaving the door open for future cuts that could prop up economic growth.

The Fed’s last emergency interest rate cut came during during the 2008 financial crisis, and Tuesday’s decision appears to indicate the seriousness of the blossoming coronavirus outbreak’s potential impact on the American economy. While the move could be seen as a way to shore up the stock market, which has survived volatile swings in recent weeks, it also leaves little room for further Fed maneuvering should the stock market crash.

Following the cut, the U.S. benchmark rate is now in the range of 1 percent to 1.25 percent.

Fed rationale

“What changed was we have seen a broader spread of the virus, we have seen it spread a bit in the United States,” Powell said at a press conference following the rate cut, even as he noted that the “fundamentals of the U.S. economy remains strong.” While the effects are at an early stage, the spread of the virus is expected to “continue to grow,” he added.

UBS economist Seth Carpenter believes more cuts are on the way. “We think that more easing is in the offing; before this cut, we had already expected three cuts this year. Today’s statement of a willingness to act combined with our expectations for a slowing in the U.S. reinforce that view and clearly opens the possibility for more,” Carpenter said, noting that if the economy deteriorates more than the Fed anticipates, there’s an increasing probability that cuts could bring rates closer to zero.

Related Stories

Even a 50-basis-point cut isn’t enough to satisfy President Trump, who took to Twitter on Tuesday to complain: “The Federal Reserve is cutting but must further ease… More easing and cutting!”

According to Jared Seiberg, macro commentator at Cowen Washington Research Group, “this looks like the President needs someone to blame if the coronavirus sends the economy into a recession just before the election.”

Critics charge that a rate cut might do little to get consumers out and spending if they feel, and if government mandates, they need to remain home and adopt so-called social distancing practices that limit potential virus exposure. That, in turn, would hurt small business owners. Seiberg believes “regulators will instruct banks to work with borrowers if the coronavirus does cause factories and businesses to close in the short term…. The idea is to not force customers into foreclosure or default solely because the coronavirus disrupted their expected cash flows.”

WalletHub CEO Odysseas Papadimitriou believes the emergency rate cut should serve as a wake-up call for businesses to begin readying coronavirus contingency plans, if they haven’t yet already. “Companies have two major objectives in doing so: minimizing interruptions to business processes and safeguarding human capital. They go hand-in-hand, too. In particular, making adjustments to operate remotely is especially important right now,” he said.

Goldman Sachs has projected that U.S. economic growth could very well stall in the second quarter, which starts in April. Last week, Congress began the process of preparing for a $7.5 billion emergency funding package to help fight a possible U.S. coronavirus epidemic.

City and state

At Trump’s press conference last week, Vice President Mike Pence, who the president as the point person to coordinate among the different federal agencies working on the coronavirus crisis, said,”There is no higher priority than the safety, health and well-being of the American people.” A White House task force had been reaching out to governors and officials at state and local levels on “how to respond to the potential threat of the coronavirus,” he added.

“Yesterday, the nation’s governors joined Vice President Pence for a teleconference to discuss the coordinated federal-state response to the 2019 novel coronavirus,” New York governor Andrew Cuomo and his Maryland counterpart Larry Hogan said in a joint statement.

“We appreciate the vice president’s commitment to ensuring that states have the resources we need to protect the health and safety of our citizens,” they continued, “and we urge the Administration and Congress to reject partisanship and work together as they negotiate emergency supplemental appropriations for the national coronavirus response.”

The nation’s governors “will stay in close contact and hold weekly calls as we work together to tackle this public health threat,” the pair said.

Global economic policy

If the Fed lowers rates to near zero, it will have few, if any, weapons in its arsenal if the economic growth further deteriorates. The U.S. is not alone in facing this predicament.

Other countries and central banks are facing a similar concern over economic damage stemming from the virus, now known as COVID-19. The Reserve Bank of Australia also cut its cash rate Tuesday morning by 25 basis points to 0.5 percent. The European Central Bank signaled a willingness to cut rates as well. The actions followed a Tuesday meeting of the G7 group, where finance ministers pledged action, including Canada, France, Germany, Italy, Japan, the U.K. and the U.S.

How much worse could the economic outlook could become remains unclear. “The situation surrounding COVID-19 is continuing to evolve rapidly, with difficult-to-ascertain economic impacts, so the outlook for interest rates is also more uncertain,” Ken Matheny, IHS Markit senior economist, said.

While Matheny was commenting on U.S. rate policy, the same concerns apply globally. Even before the coronavirus outbreak, the central banks in many countries already had negative interest rates–a sign of economic weakness– as of the tail end of 2019. They include Japan, -0.10 percent; Sweden, -0.30 percent; the European Central Bank, -0.40 percent; Denmark, -0.70 percent and Switzerland, -.80 percent.

As of March 3, the World Health Organization’s situation report shows the coronavirus outbreak—which originated in Wuhan, China, in late December—includes 90,870 confirmed cases worldwide, and the death toll has risen to at least 3,112.