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Fed Is Ready to Cut Rates in Response to Coronavirus

Doug Whiteman
Fed Is Ready to Cut Rates in Response to Coronavirus

As the worldwide coronavirus crisis mushrooms and as worries about the potential economic dangers pound away at stocks, the Federal Reserve is telling financial markets: "It's OK — we got this."

Fed Chairman Jerome Powell on Friday issued a rare and brief statement attempting to reassure investors who've been in a panic all week. He signaled that the U.S. central bank is prepared to cut interest rates to protect the economy from the growing threat.

Have you been worried about your shrinking 401(k) or IRA balance? This one of those times when you want to have a financial adviser you can turn to. But you can take some comfort knowing that the Fed is on the case.

Powell: Economy faces 'evolving risks' from virus

Powell wants you to know that the economy remains in a good position (its "fundamentals" remain strong, as he puts it), but he says the outbreak threatens to knock it off course.

"The coronavirus poses evolving risks to economic activity," Powell's statement says. "The Federal Reserve is closely monitoring developments and their implications for the economic outlook."

The release ends with the most important piece of information: "We will use our tools and act as appropriate to support the economy."

Translation: Central bank policymakers will respond with rate cuts and any other necessary measures to keep the economy on track.

Major rate cut expected

Shortly after the chairman made his news, the CME FedWatch Tool — a closely followed Fed forecasting gauge — predicted that Powell and his colleagues would slash interest rates next month by one-half of one percentage point. That's double the size of the typical rate cut.

The tool forecasts that the officials will lower interest rates again in late April, by one-quarter of one percentage point.

Remember, when the Fed cuts rates, major banks lower the prime lending rate, the rates on credit cards and home equity lines of credit (HELOCs) come down, and other borrowing costs like mortgage rates may be pulled lower, too.

Last year, the Fed reduced rates three times over three months. When this year began, many observers were betting that America's central bank would just chill in 2020 — not make any moves.

But that was before the coronavirus flared up.

Comparisons to the financial crisis

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The coronavirus outbreak poses an economic threat similar to the 2008 financial crisis.

The deadly virus has spread to more than 50 countries, including the U.S., where at least 33 people in California have tested positive and another 8,400 are being monitored after returning from overseas.

In China, where the outbreak first emerged, over 2,700 people have died, and factories, stores and Disney theme parks shut down as part of efforts contain the health threat.

The coronavirus is being compared to the 2008 financial crisis because of the potential risks for the world economy. Wall Street is very worried about those dangers, so the stock market just had its worst week since the crisis days.

The Fed came to the rescue back then and took extreme measures to nurse the economy back to health. It cut a key interest rate 10 times in 2007 and 2008 until it was near zero — an all-time low. And it kept it at that level for seven years.

The central bank has its battle armor on again, though this time it doesn't have quite as much ammunition as it did during those dark days over a decade ago.

Mortgage rates are close to all-time lows, other interest rates also are in the basement, and the Fed doesn't have a whole lot of room to do much cutting.

Negative interest rates, anyone?