Fed makes emergency rate cut amid heightened coronavirus fears
WASHINGTON — The Federal Reserve has voted unanimously to cut the interest rate 50 basis points to between 1%-1.25% effective March 4, in light of recent pressure on the markets from increased fears about the spread of the novel coronavirus.
The Federal Open Market Committee authorized the Federal Reserve Bank of New York to “undertake open market operations as necessary” to maintain the federal funds rate in the target range of 1% to 1.25% and to continue repo operations until at least through April.
As more coronavirus cases were discovered last week in the U.S., all three stock indexes fell into correction territory and the Dow logged its worst week since 2008. Yet the Dow was up roughly 2% as of Monday afternoon.
Read more: Complete coverage of the coronavirus impact
The market drop last week, the worst since 2008, came amid concerns about supply chain disruptions, reduced demand and stalled growth related to the emerging COVID-19 outbreak.
The Dow Jones industrial average dropped nearly 12% last week before rebounding Monday. Markets were starting to drop again Tuesday morning before the Fed’s announcement.
Fed Chairman Jerome Powell on Friday indicated that the agency might attempt to shore up flailing markets with an interest rate cut, though it is highly unusual for the Fed to make changes to the federal funds rate outside of its regularly scheduled meetings. The last emergency Fed action was in 2008 in response to the deepening financial crisis. Tuesday's action was also the first Fed rate change of more than 25 basis points since the financial crisis.
Some analysts have suggested that markets should not look to the Fed to shore up markets because the coronavirus outbreak relates to public health rather than market confidence.
Other industry groups, such as the Bank Policy Institute, have argued that in addition to cutting the federal funds rate, the Fed should take additional actions, including reducing banks’ required reserve levels to zero and reduce the premium for access to its discount window.