- The Federal Reserve made a surprise cut to interest rates of 50 basis points on Tuesday in response to the growing coronavirus threat.
- Experts welcomed the decision and predicted other central banks could follow suit.
- However, they warned the Fed could be left short of options if coronavirus continues to hammer consumer demand and disrupt production and supply chains.
- Visit Business Insider’s homepage for more stories.
The Federal Reserve slashed interest rates by 50 basis points to between 1% and 1.25% on Tuesday in an effort to shore up the US economy against the growing threat of coronavirus. The central bank said the epidemic “poses evolving risks to economic activity” and the cut would help to maximize employment and stabilize prices.
Here’s what four experts said immediately after the Fed made its move:
- Naeem Aslam, chief market analyst at AvaTrade:
“The Fed has proved today that it is willing to do whatever it takes to keep the bull market alive. I think the flood gate is wide open and other central banks like the Bank of Canada are likely to follow the same path.”
- Seema Shah, chief strategist at Principal Global Investors:
“The surprise cut will deliver a confidence boost and should lead to an easing of financial conditions that had tightened sharply in recent weeks. Questions still remain about how policy rate cuts can help the economy if quarantines and travel barriers are introduced. Certainly, rate cuts will not help re-stock emptying grocery shelves. Monetary policy is hopeless when supply simply cannot feed demand.”
“Markets will likely surge today, riding a new monetary sugar high. Yet, if coronavirus cases continue to multiply, risk assets may quickly remember that this is one mess central bankers cannot fix.”
- Neil Wilson, chief market analyst for Markets.com:
“The worry is that the Fed has used its firepower and the market doesn’t pick up. There is a real sense that the Fed is moving mainly to avoid being behind the curve.”
“You could see the dominoes fall now,” Wilson continued, referring to other central banks following the Fed’s lead.
Fed Chair Jerome Powell “will also face criticism for appearing to be the lap dog of the president,” he added.
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- Ian Shepherdson, chief economist at Pantheon Macroeconomics:
“This is a welcome move. It won’t prevent the economy slowing if the virus takes hold in the US, but it will ease the cost of working capital for businesses if demand falters or supply chains lengthen, and it signals to markets that the Fed has their backs. After 12 years of the Fed put, this was not the time to play hardball.”
Shepherdson expects the Fed to cut rates by another 50 basis points before July unless the coronavirus threat is clearly contained. He also predicts the US government will try to stimulate the economy through tax cuts, higher spending on healthcare, and support for small businesses.
“In the worst-case scenario, where tens of millions of people catch the virus, these measures won’t prevent economic meltdown,” he said. “In a more plausible scenario, where infection control keeps cases in the thousands or tens of thousands, and warmer weather brings relief, combined monetary and fiscal measures ought to keep the economy out of recession.”
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