Central Bank Slashes Interest Rate Amid Virus Fears

(CN) – The Federal Reserve on Tuesday announced an emergency half-point cut to its key interest rate, a move meant to protect the economy as the coronavirus outbreak slows markets around the world.

The large cut in the benchmark short-term rate – which influences consumer and business loans from mortgages to credit cards and home equity lines of credit – comes after three cuts last year in response to fears of a global slowdown, before the outbreak began in Wuhan, China, and spread across the globe.

Trader Steven Kaplan watches the numbers at the closing bell on the floor of the New York Stock Exchange on Monday. (AP Photo/Richard Drew)

The half-point decrease is the biggest cut since fall 2008 and was made in a unanimous vote. The rate is now between 1% and 1.25%.

The Fed said in a statement Monday morning that it is “is closely monitoring developments and their implications for the economic outlook.”

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity,” the statement reads. “In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent.”

At a news conference after the announcement, Federal Reserve Chairman Jerome Powell pointed to “a broader spread of the virus” as the reason for cutting rates now after declining to do so last week.

“We saw a risk to the economy and we chose to act,” Powell said. He also said the coronavirus “will surely weigh on economic activity both here and abroad for some time.”

The Dow Jones Industrial Average initially jumped after the news, but was down about 300 points by late morning. The Dow had surged 5% Monday on hopes that the central bank would intervene.

Josh Bivens, research director at the nonprofit think tank Economic Policy Institute, said that while the Federal Reserve is a very important economic institution, it is “largely a sideshow in the response to Covid-19,” using the official name of the coronavirus.

“For one thing, their main instrument to boost demand (cutting interest rates) operates with a lag that is long enough to likely miss much of the epidemic’s duration,” he wrote in a blog post Tuesday. “Further, unlike fiscal policy responses, the Fed’s tool really cannot be tailored or targeted in any way to alleviate particular distress.” (Parentheses in original.)

The Fed’s move comes after the G-7 group of major industrial nations pledged earlier Tuesday to use available tools to help shield their economies from impacts of the virus outbreak.

In a joint statement, the U.S., Britain, Canada, France, Germany, Italy and Japan said their finance ministers “are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase.”

“G7 central banks will continue to fulfill their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system,” the countries said.

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