The Federal Reserve made an emergency interest rate cut Tuesday, slashing the benchmark U.S. interest rate by half a percentage point, the biggest cut since the financial crisis and a sign that global central banks are prepared to act to contain the economic fallout from the coronavirus.
This story by Heather Long originally appeared in The Washington Post.
The U.S. central bank has not made an emergency move like this since late 2008. Fed leaders voted unanimously in favor of the rate reduction to help stabilize the economy and financial markets as the coronavirus spreads. The highly unusual move comes on the heels of other central banks around the world lowering their interest rates and calls by President Trump for a “big” Fed rate cut.
“The coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the [Fed] decided today to lower the target range for the federal funds rate by 1/2 percentage point,” the Fed wrote in a statement.
The Fed’s action reduces the U.S. interest rate to just below 1.25 percent, down from 1.75 percent. Fed Chair Jerome Powell plans to hold a news conference at 11 a.m. on Tuesday to discuss the rare move.
Stocks initially surged on the news, but the Dow Jones industrial average then slide back into negative territory, a reminder of how volatile the situation remains as everyone from doctors to Wall Street traders are trying to get a handle on how much more the coronavirus will spread and how widespread the damage will be.
The last time the Fed made a move like this was after investment bank Lehman Brothers went bankrupt and the global banking system was at risk. The Fed has tried to downplay the risks now – even calling the U.S. economy “strong” in its statement Tuesday – but analysts remain on edge.
Rate cuts are the main way governments and central banks have in the past tried to address an economic downturn, but it’s uncertain how useful these tactics might be in the current crisis. Interest rates are already very low and it’s unlikely that people will want to go out and spend more money if they are concerned about catching the coronavirus. Cutting taxes is also unlikely to boost production if manufacturers can’t get the parts they need because of supply chain disruptions.