Fed’s Emergency Cut Reveals the Lack of Tools to Deal with Corona-Crisis

The Fed implemented an emergency rate cut of -50 bps on Tuesday, just two weeks ahead of the FOMC meeting scheduled on March 18. The Fed funds rate range now stands at 1-1.5%. While the move is not entirely surprising, given Chair Jerome Powell’s statement last Friday and Goldman Sachs’ report that followed, it reveals the severity of the impacts that the coronavirus outbreak can bring. More importantly, it reveals the lack of tools the Fed, as well as global central banks, can manipulate in face of the largest headwind since the global financial crisis in 2007/08. We expect more rate cuts to be adopted later this year. Depending on the development of the pandemic, as well as US’ economic data, another reduction can come in as soon as the March meeting, i.e. : in two weeks’ time.

Chair Powell noted at the press conference that US economic outlook has been “changed materially” by the coronavirus outbreak which would “weigh on economic activity here and abroad for some time”. This is the key reason for the intermeeting rate cut. With regards to the monetary policy outlook, he affirmed that the central bank was “prepared to use our tools and act appropriately”. Meanwhile, he reiterated that “we do like our current policy stance…we think it’s appropriate to support our dual mandate goals”. He also pledged to “keep the US economy strong as we meet this challenge” and that it was “possible” that there would be more formal coordination from policymakers going forward.

It appears that the Fed is ambivalent concerning whether there will be more rate cuts in coming months. Indeed, it is hinged on a number of fast-changing factors, such as developments of the coronavirus spread, the number reported cases in the US, the situation after the restart of China’s factories, as well as US’ domestic economic data. The market has priced in another rate cut in as soon as the March meeting.

The emergency rate cut has repercussion for the financial markets and other central bankers. The move has sent a signal that economic developments in the US and the world would be severely affected by the coronovirus outbreak. The impacts could last for some time, rather than in the short-term. Renewed selling in S&P 500 suggested that investors were unimpressed by the move and they were concerned about the limited moentary policy tools that central banks can use as global interest rates have already been staying at exceptionally low levels.