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Fed Cuts Interest Rate by 0.5 Percent

By on March 3, 2020

SAN JUAN — The Federal Reserve Bank reduced its benchmark interest rate by a half percentage point amid concerns that the Covid-19 outbreak could affect the U.S. economy.

The action marks the central bank’s first in-between policy meetings since the 2008 financial crisis.

“The fundamentals of the U.S. economy remain strong. However, 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 Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent,” the Fed Board of Governors said in a statement.

“The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy,” the board added.

The vote to lower the benchmark interest rate was unanimous. With this decision, the fed funds rate was set in the range of between 1 and 1.5 percent.

Stocks fluctuated wildly after Fed Chairman Jerome Powell’s noon press conference announcing the rate cut. Powell stressed that the U.S. economy was strong but that the strain on industries like tourism and travel, as well as supply chains, was becoming apparent in sentiment surveys. Airlines continued to cancel or reduce flights Tuesday.

The Dow Jones Industrial Average swung 990 points from its high to low-point in a roller-coaster morning of trading. The index was down 427.77 points, or 1.6 percent, setting at 26,275.53 as of 12:52 p.m. The S&P 500 was down 25.12 points, or 0.81 percent, to set at 3,065.11, while the Nasdaq Composite was down 61.44 points, or 0.69 percent, to set at 8,890.65.

The surprise move by the Fed followed a wild rally on Monday in which the Dow recorded its highest point gain in history. This follows last week’s closing of the world’s main stock exchanges with dramatic losses in view of the rapid spread of the novel coronavirus and concerns that its impact on different economies will lead to a global recession.

According to a Bank of America analysis, Euro Zone growth, which had been estimated at 1 percent, was reduced to 0.6 percent due to the outbreak. Italy, the most affected eurozone economy, will see a contraction as its estimated growth was downgraded from 0.3 percent to negative-0.2 percent.

Spain’s estimated growth was reduced by two-tenths of a point—from 1.6 percent to 1.4 percent. Germany will now see growth of 0.1 percent instead of the previously estimated 0.5 percent. All in all, the world economy is expected to grow 2.8 percent instead of the previous target of 3.1 percent.

Meanwhile, Goldman Sachs downgraded the expected growth of the U.S. economy to 1.2 percent during the first half of 2020.

Covid-19 has infected 92,798 people in 77 countries and territories since the virus was first detected in December in the city of Wuhan, capital of the Hubei province of China. The death toll from the virus has reached 3,164—with most still in China but a growing number being registered in other countries, with South Korea, Iran and Italy particularly hard-hit.

The death toll from the new coronavirus in the United States climbed to six Monday as the contagion took root in the Pacific Northwest and continued its march across the globe.  All of the U.S. deaths have occurred in the state of Washington, where officials warned residents the battle against the disease was shifting from containment to mitigation.

Of the 41,165 people who are currently infected by the novel coronavirus, 83 percent are in mild condition while 17 percent are in serious or critical condition. Some 48,469 people have recovered from the virus.

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