In an emergency measure, the U.S. Federal Reserve cut interest rates by 0.5% on Tuesday, citing concerns about the negative economic impact of the COVID-19 coronavirus outbreak. The Fed lowered its fed fund target rate range from between 1.5% and 1.75% to a new target range of between 1% and 1.25%.
The move was widely expected to come some time this month. The bond market had priced in a 100% chance of at least a 0.25% rate cut in March, according to CME Group. In a statement, the Fed said the coronavirus “poses evolving risks” to the U.S. economy.
“In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate,” the Fed said in a statement.
The rate cut comes after Goldman Sachs cut its first-quarter U.S. GDP growth target to 0.9% an its second quarter target to 0%. Goldman expects growth to return to 1% and 2.25% in the third and fourth quarters, respectively.
All 10 Fed members voted unanimously for the 0.5% rate cut.
Under Pressure
The Federal Reserve has been under pressure all year from President Donald Trump to cut interest rates, raising concerns about the Fed’s independence.
“Should ease and cut rate big. Jerome Powell led Federal Reserve has called it wrong from day one. Sad!,” Trump tweeted Tuesday morning ahead of the rate cut announcement.
The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!
— Donald J. Trump (@realDonaldTrump) March 3, 2020
As recently as December, the Federal Reserve said it anticipated no adjustments to interest rates in 2020. Even after the emergency cut, investors anticipate additional easing later this year. The bond market is pricing in an 88.1% chance of at least one additional rate cut between now and the end of the year.
Recession Coming?
On Tuesday, coronavirus cases outside of China jumped in countries like South Korea (5,100 total cases), Italy (2,000 cases) and the U.S. (91 cases).
The Federal Reserve is hoping to support the U.S. economy and prevent significant coronavirus-related damage, but history suggests the worst may be yet to come.
Sevens Report’s Tom Essaye said Friday that another rate cut might be a bearish signal for the economy.
“While this is a fairly unique situation that the markets have rarely seen in the past, especially in the age of high-frequency trading houses and 24 hour, instant news sources, if the Fed does indeed cut rates in the coming months as the markets are pricing in, then it will mark the fourth rate cut in this cycle that began last summer, and the economy has gone into a recession within 12-24 months 100% of the time that has occurred,” Essaye said.
Bankrate.com's senior economic analyst Mark Hamrick said Tuesday that investors should expect stock market volatility to continue.
"While the statement from the FOMC says the fundamentals of the economy remain strong, central bankers are obviously concerned about developments yet to possibly unfold," Hamrick said.
"Lower interest rates do little to make consumers and businesses feel substantially more confident about the future when a health crisis is spreading around the world."
Markets React
The SPDR S&P 500 ETF Trust (NYSE: SPY) traded slightly higher by 0.6% after the Fed announcement after opening in the red.
The yield on 10-year U.S. Treasury bonds declined slightly on Tuesday to 1.085%, down 0.003% on the day.
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