March 3, 2020 / 3:05 PM / 25 days ago

Fed cuts rates to blunt coronavirus impact, markets drop

WASHINGTON (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.

U.S. Federal Reserve Chairman Jerome Powell speaks to reporters after the Federal Reserve cut interest rates in an emergency move designed to shield the world's largest economy from the impact of the coronavirus, during a news conference in Washington, U.S., March 3, 2020. REUTERS/Kevin Lamarque

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.”

With 90,000 cases worldwide in 77 countries and territories, the virus has upended global supply chains, with companies warning daily of hits to their sales and profits.

On Tuesday, the International Monetary Fund and World Bank canceled their April meetings in Washington, joining the list of organizations pulling the plug on planned events.

Central bank easing can lubricate credit markets and boost demand by lowering the cost of borrowing. But, Powell noted, it cannot repair disrupted global supply chains or convince people to fly, attend meetings or even go to school, especially if local governments or companies bar such activities.

“We do recognize that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain; we get that, we don’t think we have all the answers,” Powell said. Still, he said, it will help support “overall economic activity.”

Powell earlier on Tuesday participated in a conference call with the top finance authorities from the world’s seven largest advanced economies, which concluded with a statement that they would take all appropriate measures to support the global economy. At his news conference, he said the Fed was in active discussions with other central banks and said future coordinated action could yet occur.

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Already, there has been action by other central banks. Earlier on Tuesday, central banks in Australia and Malaysia cut rates and on Monday the Bank of Japan took steps to provide liquidity to stabilize financial markets there.

U.S. Treasury Secretary Steven Mnuchin applauded the Fed’s decision, saying it would help the U.S. economy. In a tweet after the Fed move, President Donald Trump kept up what has been constant pressure on the central bank to do even more. “More easing and more cutting,” he said.

Reporting by Lindsay Dunsmuir; Additional reporting by Jeff Mason; Writing by Ann Saphir; Editing by Dan Burns, Andrea Ricci and Dan Grebler

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