Fed surprises markets with emergency 50bps rate cut

The Federal Reserve has made an emergency policy move, cutting interest rates by 50bps, the same day as the Reserve Bank of Australia (RBA).

This was a surprise move by the central bank as it had not been due to meet until 17 March and was the first inter-meeting emergency cut since 2008.

The new rate is a range between 1%-1.25%.

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Analysts had previously expected at least a 25bps cut at its next meeting, the first of four cuts expected for 2020.

Last week, major US markets suffered their worst week of performance since the Global Financial Crisis and entered correction territory.

Anna Stupnytska, head of global macro at Fidelity International, said: “Clearly, last week’s sharp market sell-off in light of coronavirus-related anxiety and the resulting tightening in financial conditions have forced the Fed to take a pre-emptive action to reassure the market -- this is a strong signal from the policymakers.

“As the spread of the coronavirus continues and the chances of containment become slimmer, the impact on the global economy is likely to be sizeable. While easier monetary policy helps sentiment, central banks should not be acting in isolation - the governments should step in with fiscal measures that are timely and well designed, supporting the economies that struggle not just from the virus itself but also from preventative measures that - in some cases - have ground activity to a halt.”

Andrew Mulliner, global bonds portfolio manager at Janus Henderson Investors, said: "The Fed will act to support the economy and the functioning markets in any way it can. However, whilst the backing of the Fed is a prerequisite for calming markets, the reality remains that curtailing the spread of coronavirus is far from certain. 

"The reality is a supply shock (due to disrupted supply chains with links to China) is now potentially being met with a demand shock (cancellation of events, travel) should more dramatic measures be required to contain the spread of the virus. In such a scenario, cutting rates certainly won't hurt, but it certainly won't be enough to avoid major economic disruption."

The Fed's actions mirrored those by the RBA which warned its decision to cut rates from 0.75% to 0.5% was partly to “support the economy as it responds to the global coronavirus outbreak”, noting the virus was having a “significant effect” on the Australian economy.

Governor Philip Lowe also noted the RBA was prepared to take further steps to ease monetary policy which indicated possible rate cuts or quantitative easing in the future.

 




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