Federal Reserve cuts interest rates amid coronavirus risks
The US Federal Reserve cut interest rates by 50 basis points on Tuesday as it looked to counter the economic impact of the coronavirus outbreak.
In an unscheduled announcement, the US central bank cut its benchmark rate to between 1% and 1.25% from between 1.5% and 1.75%.
"The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity," the Fed said in a statement.
"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. The committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy."
Fed chairman Jerome Powell had already signalled last week that the Bank was open to a rate cut if necessary. This the first time the central bank has made an unscheduled rate cut since the 2008 financial crisis.
Stocks on both sides of the pond rallied on the news, which came just hours after G7 finance ministers and central bankers vowed to "use all appropriate policy tools" to help combat the economic impact of the virus outbreak.
"Alongside strengthening efforts to expand health services, G7 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," they said in a joint statement.
Economists said the Fed's swift move could indicate further cuts when it meets again on March 17 - 18.
ING chief international economist James Knightley said he expected two further 25 basis point cuts in the second quarter as economic activity was likely to be significantly impacted combined with a sharp fall in inflation.
Knightley forecast a plunge in energy prices on oil "while core inflation will likely edge lower as weaker demand offsets the supply shock".
Capital Economics' Paul Ashworth the Fed's decision to monitor developments and "act as appropriate" could signal that the bank was leaning toward an additional rate cut later this month, "although the emergency 50 basis points cut will go a long way to un-inverting the yield curve".
Neil Wilson, chief market analyst at Markets.com, said how the market closes on Tuesday will be "key".
"The worry is that the Fed's firepower is already spent and the market doesn't pick up," he said.
He noted that market participants were already expecting a 50 basis points cut this month, with a one third chance of a 75bps cut.
"We await to see from the Powell presser later whether this gives the Fed the optionality to launch another round of 50bps cuts at the March meeting or whether it has simply pulled these cuts forward by a couple of weeks. I think that would be a disappointment to the market hungry for lower rates."
"The Fed was seeking to surprise the market but it's only moved to reflect what the market was already pricing - the Fed is on the hook to the financial markets. Essentially the Fed is always trying to avoid being behind the curve."
Wilson pondered which central bank would be next to make a move in the wake of cuts by the Reserve Bank of Australia overnight, cutting the cash rate to a new record low of 0.5% and Malaysia, with a 25 basis point reduction to 2.5% - it's second cut this year and the lowest in a decade.
"Do the ECB and BoE and BoJ follow? The G7 statement was underwhelming to a market looking for detail but it did hint at a fiscal and monetary response on its way. The Fed has made this instant monetary move, so the market is going to be looking at whether the ECB in particular feels the need to move too. You could see the dominos fall now," he said.
RBA governor Philip Lowe said: "Prior to the outbreak, there were signs that the slowdown in the global economy that started in 2018 was coming to an end.
"It is too early to tell how persistent the effects of the coronavirus will be and at what point the global economy will return to an improving path."