It was the first unscheduled, emergency rate cut since 2008, and it also marks the biggest one-time cut since then. The new benchmark interest rate is 1% to 1.25%.
Fed Chairman Jerome Powell echoed this sentiment during a press conference Tuesday.
“We saw the risk to the outlook to the economy and chose to act,” Powell said, adding that the financial markets are functioning normally, the economy continues to perform well, and he expects the United States to fully recover after the outbreak ends.
“I don’t think anybody knows how long it will be,” Powell said, referring to the potential economic damage coronavirus could cause. “I know the US economy is strong and we’ll get to the other side of this and return to solid growth and a solid labor market as well.”
Although a rate cut won’t cure infections or fix broken supply chains, “it will help boost household and business confidence,” Powell noted.
The potential damage to the US economy is still an unknown: Powell said any coronavirus-related slowdown would be in a very early stage, although many industries, such as travel and leisure are already reporting losses to their businesses.
The emergency rate cut came as somewhat of a surprise: Although the stock market soared Monday in expectation of a rate cut, the Fed and other central banks had seemingly pooh-poohed the notion. Just last week, several Fed officials said it was too early to cut rates in the face of the global virus outbreak. Powell released a statement on Friday saying the central bank would act as appropriate.
The Fed chairman on Tuesday explained the change of heart was because of the continued spread of the disease and a risk to America’s economic outlook.
Powell noted that it’s up to individual central banks to determine whether they will act, too, as the United States just did. But he hinted further rate cuts from international central banks could be on the way.
“It’s possible you’ll see more individual action — more action moving forward,” he said.
Investors remained hopeful that the Fed would interject, however. Market expectations for a half-percentage point cut during the March 18 Fed meeting were 100% as of Tuesday morning.
“With financial markets in turmoil and evidence growing that the coronavirus is developing into a pandemic, the Fed’s change of heart is entirely understandable, wrote Paul Ashworth, chief US economist at Capital Economics.
President Donald Trump, who has long advocated for lower rates, cheered the rate cut but said the Fed needed to cut further.