Fed Announces Emergency Fed Funds Rate Cut of 50 Basis Points

*     The Federal Reserve announced a rare inter-meeting fed funds rate cut of 50 basis points.

*     The fed funds rate range is now 1.00 to 1.25 percent.

*     The Federal Open Market Committee is still set to meet over March 17/18.

In a surprise move, the Federal Reserve announced an emergency inter-meeting fed funds rate cut of 50 basis points. The following announcement was released by the Federal Reserve at 10 am eastern time today:

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 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.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Loretta J. Mester; and Randal K. Quarles.

In his press conference this morning, Fed Chair Jay Powell said that he expects the global coronavirus outbreak to weigh on economic activity for some time, but that the magnitude of the drag is highly uncertain. Nonetheless, he expects the U.S. economy to return to solid growth, including a solid labor market, very soon. According to Powell, U.S. credit markets are showing no evidence of elevated stress due to the coronavirus.

Today’s move at the Fed was preceded by Fed Chair Jay Powell’s participation this morning in a teleconference with G-7 financial ministers and central bank governors. Powell said that he is in active discussions with other central banks. This suggests that we will see coordinated action by other central banks. The Bank of Canada’s policy committee is scheduled to meet tomorrow. A rate cut there is a near certainty. The European Central Bank’s policy committee is scheduled to meet on March 12. The Bank of Japan meets on March 19, the Bank of England on March 26. Other central banks may decide to make an inter-meeting policy change like the Federal Reserve has just done.

The Fed rate cut comes as the U.S. government and the U.S. economy adapts to the threat of the coronavirus. It is important to note that there is nothing the Fed can do to change the trajectory of the global coronavirus outbreak. It cannot alter the disruption to global supply chains and the demand destruction due to the temporary cessation of business production and personal travel. However, the Fed can “foam the runway” and do what it can to support and encourage economic activity in the U.S. and foster a quick recovery from the dampening impact of the coronavirus outbreak.

We believe that there is significant downside risk to the U.S economy from the global coronavirus outbreak. We expect the U.S. economy to slow meaningfully through the first half of 2020. Therefore, the Federal Reserve may decide to cut the fed funds rate further in the months ahead.