The Federal Reserve announced Tuesday that it has cut interest rates by half a percentage point in an effort to boost the U.S. economy due to the continuing spread of the coronavirus.
“The fundamentals of the U.S. economy remain strong,” the Fed said in a statement on Tuesday. “However, the coronavirus poses evolving risks to economic activity.”
The main borrowing rate set by the fed now sits between 1% and 1.25%, which is nearing historic lows.
President Donald Trump sent out a series of tweets Tuesday morning, saying the Australian Central Bank cut interest rates and stated it will most likely further ease in order to make up for the slowdown caused by the coronavirus.
“Other countries are doing the same thing, if not more so,” Trump said on Twitter. “Our Federal Reserve has us paying higher rates than many others when we should be paying less. Tough on our exporters and puts the USA at a competitive disadvantage. Must be the other way around. Should ease and cut-rate big. Jerome Powell of the Federal Reserve has called it wrong from day one.”
A report by Politico noted that Powell, the Chairman of the Fed, addressed Congress in February and said he did not see a need to adjust interest rates. He told lawmakers, “the current stance of monetary policy will likely remain appropriate.”
Powell also said that the virus could “lead to disruptions in China that spill over the rest of the global economy” and there will “very likely” be some effect on the U.S.
In a press conference following the announcement, Powell stood by the Fed’s decision to cut interest rates and noted he is confident in the strength of the U.S. economy and that it’s “going to get to the other side of this.”
— Gregory Daco (@GregDaco) March 3, 2020
Powell said the Fed is in contact with central banks around the world on ways to alleviate financial concerns. The Dow Jones, which was positive 150 points prior to his press conference, fell by more than 300 points by the conclusion of his speech.
The Dow Jones ended the day 785 points down.
Mark Hamrick, Bankrate.com’s Senior Economic Analyst said the Fed delivered “monetary policy medicine” that investors were looking following the economic impacts of the virus.
Hamrick said the full “emergency” 50-basis point reductions—the first since the Great Recession—shows how serious the Fed believes the possible risks the virus poses to the economy.
"At issue is how much this inoculation can protect the economy and support the financial markets from a public health crisis and supply constraints radiating out from China,” he said. “While the statement from the FOMC says the fundamentals of the economy remain strong, central bankers are obviously concerned about developments yet to possibly unfold.”
Hamrick cautioned that with target rates now at 1% to 1.25%, the Fed is running out of ammunition to fight economic downturns. Another challenge is how the Fed may take back rate cuts once coronavirus and economic damage have subsided.
"Lower interest rates do little to make consumers and businesses feel substantially more confident about the future when a health crisis is spreading around the world,” he said. “It also cannot address the hobbled supply chains, including manufacturing capability in China and South Korea. Still, the Fed is doing what it can to try to keep the economy out of recession."
WalletHub CEO Odysseas Papadimitriou agrees that lower interest was the right call in response to the virus because of the risk of it turning into a pandemic before treatment becomes available is “very real.”
“That is not to be alarmist, but being proactive is the best strategy in insulating the economy,” Papadimitriou said. “Consumer spending will go down if people stay home because of the coronavirus.”
He added “a rate cut is better than nothing,” but the federal government should be prepared to step in to support distressed industries if things get worse.
“That obviously should take a backseat to immediate investments in healthcare capabilities. But if the coronavirus spreads throughout the economy and the fear we’re seeing in markets really manifests itself in hard economic data, that would only compound our problems,” he said.
Lawrence Yun, Chief Economist at the National Association of Realtors, said the coronavirus has "quickly upended globe economic expansion" and introduced the uncertainty of a possible recession.
“Today’s interest rate cut is, therefore, an appropriate response to changing events. The real estate sector will hold up very well because of the rate cut. Hesitant home buyers will be enticed to take advantage of low-interest rates. Commercial property prices will rise due to higher returns that can be had from the bond market after adjusting for risks," Yun said.