Fed cuts rates due to coronavirus

In what's been the first inter-meeting rate cut since the 2008/2009 financial crisis, the Fed's Federal Open Market Committee on Tuesday explained its surprise move with an "evolving risk to economic activity" from the spreading coronavirus.

The vote for the emergency cut to a range of 1% to 1.25% was unanimous and comes 15 days before the Fed's next scheduled policy meeting.

The central bank said it was "closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy."

Currently amid the longest-ever expansion, the US economy's fundamentals would "remain strong," the central banks noted however.

Nevertheless, the unusually large cut in US benchmark interest rates reflects growing concerns that the spreading virus will strongly hit economies around the world.

Concerted effort?

The Fed's action could be just the first shot in a barrage of rate cuts from central banks worldwide. It came hours after Fed Chairman Jerome Powell and the finance chiefs from the Group of Seven (G7) nations said they would "use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks."

The reduction constitutes a stark shift in the central bank's policy. Previously, Fed policymakers indicated that they would remain on the sidelines during the US election campaign and not lower rates in the course of the year. They pledged to monitor the coronavirus situation, but argued monetary policy was already easy and the fundamentals of the economy strong with unemployment near a 50-year low.

But as the number of reported cases of the virus rose around the world and the US reported its first fatality, pressure mounted on the Fed to boost confidence in the financial markets with a rate cut. Lower interest rates can also help sustain consumer and business sentiment during the current health crisis and ease financial conditions for companies by making debt payments easier to manage.

Most of the world's advanced economies, including Britain, Canada, France, Germany, Italy and Japan, already have very low or negative interest rates. That is why the US Fed is the best-placed major central bank to fight the economic fallout of the spreading coronavirus.

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