Federal Reserve announces first emergency rate cut since the financial crisis

The Federal Reserve slashed interest rates by half a percentage point on Tuesday in the wake of concerns that the coronavirus outbreak could damage the US economy.

Posted: Mar 3, 2020 7:40 PM
Updated: Mar 3, 2020 7:40 PM

The Federal Reserve slashed interest rates by half a percentage point on Tuesday, a bold attempt to give the US economy a jolt in the face of concerns about the coronavirus outbreak.

It was the first unscheduled, emergency rate cut since 2008, and it also marks the biggest one-time cut since then. The new benchmark interest rate is a range of between 1% and 1.25%.

A bad sign for the economy

Although the fundamentals of the US economy remain strong, "the coronavirus poses evolving risks to economic activity," the central bank said in a statement.

Fed Chairman Jerome Powell echoed this sentiment during his subsequent press conference Tuesday.

"We saw the risk to the outlook to the economy and chose to act," Powell said, adding that the financial markets are functioning normally, the economy continues to perform well, and that he expects the United States to fully recover after the outbreak ends.

The emergency rate cut came as somewhat of a surprise: Although the stock market soared Monday in expectation of a rate cut (the market predicted a 100% chance of a cut in March), the Fed and other central banks had seemingly pooh-poohed the notion as recently as Tuesday morning.

That whiplash signaled that the outlook for America might have been in more jeopardy than previously thought. The US stock market tumbled, with the Dow tanking as many as 608 points at its low-point on Tuesday.

"I don't think anybody knows how long it will be," Powell said, referring to the potential economic damage coronavirus could cause. "I know the US economy is strong and we'll get to the other side of this and return to solid growth and a solid labor market as well."

Although a rate cut won't cure infections or fix broken supply chains, "it will help boost household and business confidence," Powell noted.

The potential damage to the US economy is still an unknown: Powell said any coronavirus-related slowdown would be in a very early stage, although many industries, such as travel and leisure are already reporting losses to their businesses.

The central bank did not discuss any other forms of stimulus, he said. But the market expects the Fed to continue to further slash rates to respond to coronavirus: The stock market has priced in a 60% chance of a quarter-point rate cut at the Fed's meeting in April, according the CME FedWatch Tool.

Coronavirus confusion

The G7 disappointed investors hoping for coordinated monetary policy action Tuesday morning. And just last week, several Fed officials said it was too early to cut rates in the face of the global virus outbreak. Powell released a statement on Friday saying the central bank would act as appropriate, which sounded like the central bank was taking a wait-and-see approach.

The Fed chairman on Tuesday explained the change of heart was because of the continued spread of the disease and a risk to America's economic outlook.

Economists are worried about the effect the outbreak will have on global supply chains, trade and consumer spending. The latter is the backbone of the US economy.

On Monday, the Organization for Economic Cooperation and Development warned that global growth could be cut in half if the outbreak continues to spread. Many of the world's biggest companies, including Apple and Microsoft, have issued profit and sales warnings in recent weeks because of travel restrictions, factory closures and supply chain issues.

With respect to coordinated action of multiple central banks, Powell noted that it's up to individual banks to determine whether they will act, too, as the United States just did. But he hinted further rate cuts from international central banks could be on the way. The Reserve Bank of Australia slashed rates by a quarter-percentage point on Tuesday.

"It's possible you'll see more individual action -- more action moving forward," Powell said.

"With financial markets in turmoil and evidence growing that the coronavirus is developing into a pandemic, the Fed's change of heart is entirely understandable, wrote Paul Ashworth, chief US economist at Capital Economics.

President Donald Trump, who has long advocated for lower rates, cheered the rate cut but said the Fed needed to cut further.

Indiana Coronavirus Cases

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Reported Deaths: 4065
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Marion25151785
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Hamilton6117113
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Tippecanoe369515
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Ohio Coronavirus Cases

Data is updated nightly.

Confirmed Cases: 190430

Reported Deaths: 5161
CountyConfirmedDeaths
Franklin31466640
Cuyahoga19706682
Hamilton16687343
Montgomery10377189
Lucas8285373
Butler8276129
Summit6689265
Warren420064
Stark3796181
Mahoning3709286
Marion338850
Pickaway301146
Delaware287227
Lorain272889
Fairfield264457
Licking257966
Wood249681
Clark249456
Clermont245938
Greene229242
Trumbull2270134
Allen213073
Columbiana212887
Miami199958
Lake193659
Medina185642
Portage162068
Mercer152128
Wayne140269
Ross139436
Richland132324
Tuscarawas129024
Athens12052
Erie115553
Darke114451
Madison105415
Hancock104725
Auglaize100616
Putnam97427
Lawrence93025
Shelby90914
Muskingum8884
Geauga85950
Scioto8599
Belmont78827
Union7583
Ashtabula72648
Sandusky71122
Huron70912
Preble62418
Holmes61710
Seneca60114
Ottawa58430
Fulton53711
Henry47317
Jefferson4694
Clinton46413
Defiance46013
Jackson4598
Crawford4528
Fayette4498
Highland4304
Logan4233
Ashland3986
Champaign3983
Knox38416
Brown3793
Perry36611
Washington35124
Morrow3442
Hardin33613
Williams3354
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Pike3000
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