FED Cuts Rates by Half Percentage Point to Combat Coronavirus Outbreak

Central bank lowers federal funds rate range to 1% to 1.25% amid increasing unease over the economic effects from the novel coronavirus spread.

BY SAHIL DESAI                                                                                                                                         3 Mins Read

The Federal Reserve announced an emergency rate cut on March 3, Tuesday in response to the economic impact of the coronavirus spread, trimming USA's benchmark borrowing rate by half a percentage point.

The move was the first unscheduled, emergency rate cut since the financial crisis of 2008 amid a volatile patch on Wall Street and amid a steady stream of hectoring from President Donald Trump, who has called for lower rates to stay competitive with policy at other global central banks. The rate cut marks the biggest one-time cut since 2008. The range of the federal funds rate is currently 1.0% to 1.25%.

The federal funds rate is the benchmark interest rate banks charge each other for overnight loans. It’s the main way central bankers add or remove liquidity into the financial system and it also reflects the health of the economy.

The Federal Reserve is the central bank of the United States which promotes economic stability, mainly by raising or lowering the cost of borrowing. The Fed said it lowered interest rates because; although the fundamentals of the U.S. economy are strong, the spread of the coronavirus has brought new challenges and risks to economic activity. Since the economy was slowing, the Fed decided to lower interest rates to make it cheaper for businesses to borrow money, invest, and create jobs. Lower interest rates also tend to make consumers more eager to borrow and spend, which keeps money flowing through the economy.

According to them the rate cut is an emergency measure that underscores the Fed’s commitment to keeping the economy on track, as the virus and the aggressive response to it cause an economic slowdown to percolate through the global economy.

Does cutting interest rates actually help the problem at hand, which is trying to help the world economy through concerns about the coronavirus?

For

Against

Although a rate cut won't cure infections or fix broken supply chains, “it will help boost household and business confidence”. “What it does more than anything else is it improves sentiment and buys time for fiscal authorities to figure out the response to the economic consequences of the virus,” said Solita Marcelli, deputy chief investment officer for the Americas at UBS Global Wealth Management.

According to some economists, the rate cut has virtually nothing to do with it. Unless the Fed figures out how to get in the face mask manufacturing business, or figures out a way to buy tons of copper to support the supply chain. According to them Fed is supposed to supply liquidity to the financial market and ensure a stable economy, by way of maximum employment and price stability. At this point, there’s no reason to intervene as the economy’s problems have nothing to do with the cost of money, which is already at extra record lows. It has to do with real world contagion and a virus. A half a point is not going to cure anybody.