SINGAPORE (Mar 4): The US Federal Reserve has slashed rates by half a percentage point on Tuesday.
In a unanimous vote by the 17-member committee, the benchmark lending rate was dropped to a target range between 1 to 1.25%.
In its first emergency rate cut since the 2008 financial crisis, the move aims to prevent the US economy from slowing down due to the uncertainty of the novel coronavirus outbreak. It comes in spite of Fed Chairman Jerome Powell’s previous direction of keeping rates for the year unchanged.
“We saw the risk to the outlook of the economy and chose to act,” says Powell at the press conference in Washington following the Fed’s open committee meeting on Mar 2.
He believes this rate cut will “help boost household and business confidence”.
This took analysts by surprise, with Anna Stupnyatska, Head of Global Macro at Fidelity noting that the much faster than expected move was not expected to come until the scheduled meeting later this month.
“Clearly, last week’s sharp market sell-off in light of the Covid-19 related uncertainty and the resultant tightening in financial conditions have forced the Fed to take pre-emptive action to reassure the market,” she observes.
US stocks reacted immediately to the announcement with the S&P500 closing 2.8% lower on Tuesday – a significant decline from the previous day’s 4.6% surge.
The Nasdaq composite closed nearly 3% lower, while the Dow Jones was down 2.9% or 786 points, to close at 25,917 points.
Meanwhile, the yield on the benchmark 10-year Treasury fell below 1% - for the first time ever – before moving back to 1% by the closing bell.
For now, Powell suggests that further rate cuts may be on the horizon.
“The virus and the measures that are being taken to contain it will surely weigh on economic activity, both here and abroad for some time,” he said adding that the “Fed is prepared to use our tools and act appropriately, depending on the flow of events”.
