Fed announces first emergency rate cut since 2008 crisis

The Federal Reserve cut the key interest rate by half a percentage point in the first emergency cut since the 2008 financial crisis.

 Anneken Tappe reported the news for CNN:

The Federal Reserve slashed interest rates by half a percentage point on Tuesday, a bold attempt to give the US economy a jolt in the face of concerns about the coronavirus outbreak.

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 a range of between 1% and 1.25%.

Although the fundamentals of the US economy remain strong, “the coronavirus poses evolving risks to economic activity,” the central bank said in a statement.

Fed Chairman Jerome Powell echoed this sentiment during his subsequent 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 that he expects the United States to fully recover after the outbreak ends.

The emergency rate cut came as somewhat of a surprise: Although the stock market soared Monday in expectation of a rate cut (the market predicted a 100% chance of a cut in March), the Fed and other central banks had seemingly pooh-poohed the notion as recently as Tuesday morning.

William Watts from MarketWatch wrote:

The stock market tumbled Tuesday, with investors apparently rattled rather than comforted by the Federal Reserve’s decision to deliver a rare, emergency rate cut aimed at shielding the economy from disruptions caused by the global spread of COVID-19.

“I think the Fed’s rate cut backfired in many ways. Instead of soothing the market, it’s reignited investors’ worst fears,” Michael Arone, chief investment strategist for State Street Global Advisors, told MarketWatch in a phone interview.

Stocks initially jumped after the Fed announced a half-point cut, but gains proved short-lived. The Dow Jones Industrial Average DJIA, -2.94%  fell nearly 1,000 points at its session low and ended the day down 785.91 points, or 2.9%, at 25,917.41, while the S&P 500 SPX, -2.81%  dropped 2.8% and the Nasdaq Composite COMP, -2.99% lost 3%.

Meanwhile, investors piled into safe-haven assets, including Treasurys, driving the yield on the benchmark 10-year note TMUBMUSD10Y, -1.31%  below 1% for the first time ever. Yields fall as debt prices rise.

Jessica Dickler noted for CNBC:

Interest rates are now historically low, which leaves the central bank with little wiggle room in the event of a recession or if the economy stumbles further. The Fed’s benchmark funds rate will be targeted in a range between 1% and 1.25%.

“The full emergency 50 basis points reduction is the first since the financial crisis, a sign how serious central bankers regard the downside risks to the economy,” said Mark Hamrick, senior economic analyst at Bankrate.com.

“The Fed’s most reliable ammunition, meaning lower rates, are dwindling,” Hamrick said.

Although the federal funds rate, which is what banks charge one another for short-term borrowing, is not the rate that consumers pay, the Fed’s moves still affect the borrowing and saving rates they see every day.

On the upside, “lower rates provide an opportunity for lower cost borrowing,” Hamrick said.