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US Fed cuts rates to blunt coronavirus impact, markets drop
Fed Chairman Jerome Powell | Photo Credit: Reuters

The U.S. Federal Reserve cut interest rates on Tuesday in a bid to shield the world’s largest economy from the impact of the coronavirus, but the emergency move failed to comfort U.S. financial markets roiled by worries about a deeper, lasting slowdown.

Fed Chair Jerome Powell reiterated his view that the U.S. economy remains strong, but said the spread of the virus had caused a material change in the U.S. central bank’s outlook for growth.

“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,” Powell said in a news conference shortly after policymakers unanimously decided to cut rates by a half percentage point to a target range of 1.00% to 1.25%.

Underscoring how grave the central bank views the fast-evolving situation, it was the first rate cut outside of a regularly scheduled policymaker meeting since 2008 at the height of the financial crisis.

“We’ve come to the view now that it is time to act in support of the economy,” he said. “I do know that the U.S. economy is strong and we will get to the other side of this; I fully expect that we will return to solid growth and a solid labor market as well.”

Powell acknowledged the outlook is uncertain and the situation “fluid.”

The pathogen, which originated in China, causes respiratory illness that has been fatal in an estimated 2% of cases, and governments and companies have shut schools and restricted travel and large gatherings in response, crimping factory output in China and disrupting production of goods worldwide.

All three major U.S. stock market indexes closed nearly 3% lower, while the yield on the 10-year U.S. Treasury note dropped below 1% for the first time ever.

President Donald Trump, arriving at the White House as U.S. markets closed, told reporters he had not seen the market’s drop on Tuesday and was focused on the federal coronavirus response.

“I think they should do more. I think they hinted that they’re not going to do much more, and that’s unfortunate. He gave a very bad signal, in my opinion,” he said of Powell.

Traders believe the Fed is not done. Futures tied to the Fed’s policy rate were pricing in another rate cut by June. Fed policymakers will provide their own rate path expectations, along with forecasts for economic growth, at the end of their March 17-18 meeting.

Turnaround

Just over a week ago, most Fed officials said they expected the effects of the virus to be temporary and stuck to their view that after three rate cuts last year, the U.S. economy was well-positioned to weather shocks.

“The questions now become whether, how much, and when the Fed might deliver further monetary policy easing,” Oxford Economics analyst Gregory Daco wrote after Powell’s news conference. “If Fed officials deem that odds of an impending recession are elevated, they’ll continue to be very aggressive in cutting rates.”

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