WASHINGTON (AFP) – The US Federal Reserve (Fed) led the charge in the global response to the growing economic risk posed by the coronavirus, announcing an emergency interest rate cut Tuesday to boost confidence.
But the immediate impact seemed the opposite of what was intended: Investors fled to safe assets, sending the 10-year Treasury to its lowest ever return while stocks lost most of the ground recovered Monday.
That move came after weeks of haranguing by President Donald Trump for more stimulus, but he was not satisfied and called for even more.
In a unanimous decision, the Fed’s policy-setting committee slashed its key interest rate by a half point to a range of 1.0-1.25 – the first inter-meeting cut since late 2008 at the height of the global financial crisis.
The large, highly unusual move made just 15 days before the next scheduled policy meeting reflected growing concerns that the spreading virus will take a bite out of the US and global economies as supply chains linked to China, the epicenter of the outbreak, are shut down.
”My colleagues and I took this action to help the US economy keep strong in the face of new risks to the economic outlook,” Fed Chair Jerome Powell said in a press conference.
The market reaction seems to support the concerns of economists who worry the aggressive move goes too far and, rather than calm fears, could unsettle investors worldwide if they view it as a sign the US central bank expects a recession.
The Dow Jones Industrial average lost nearly three percent, or 800 points, eroding most of the ground recovered on Monday, while the yield on the 10-year Treasury bond fell below 1.0 percent for the first time ever.
While Powell said the US economy remains on solid footing with a strong labor market supporting household spending, the broader spread of the virus is disrupting economic activity and ”the risks to the US outlook have changed materially.”