The US central bank has cut interest rates in an emergency move to help shield its economy from the impact of the “evolving” coronavirus crisis.
The Federal Reserve, which had hinted that support was imminent following steep stock market falls last week, said it was taking half a percentage point off its federal funds rate to a new target range of 1% to 1.25%.
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The Federal Reserve is cuting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!
— Donald J. Trump (@realDonaldTrump) March 3, 2020
Sky’s economics editor Ed Conway suggested that the measure could prompt other central banks to follow suit as worries grow that efforts to contain the outbreak will cripple global growth this year.
The Fed was not due to meet and make a decision on rates for a fortnight.
The last time it cut rates between meetings was in 2008 – at the height of the financial crisis.
The surprise announcement helped stock markets in the US and Europe pile on value that was lost during the panic of last week though values remained volatile.
The central bank’s rate-setting committee announced its measure hours after the governor of the Bank of England, Mark Carney, told MPs the economic shock from the spread of COVID-19 “could prove large”.
Bank of England governor Mark Carney told MPs about the Bank’s plans to respond to the coronavirus crisis.
Just 24 hours ago, President Trump had demanded the Fed have the “lowest rate” as part of his long-running battle to bolster US competitiveness.
He tweeted in reaction to the rate cut: “The Federal Reserve is cuting (sic) but must further ease and, most importantly, come into line with other countries/competitors.
“We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!”
Rate cuts during times of potential economic shocks are designed to lower borrowing costs across the economy – supporting economic activity in the process.
The Fed’s statement said: “The fundamentals of the US 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 (FOMC) decided today to lower the target range for the federal funds rate.”
In addition to the central bank support, the US Treasury Secretary Steve Mnuchin said the government was looking at options to support businesses through COVID-19 disruption.
The Dow Jones Industrial Average on Wall Street overturned early losses to register a gain of more than 1% after the Fed’s statement was released but it later turned negative again as investors digested the implications of the announcement.
Gains the FTSE 100 had made in London were extended – with the index 2% up.
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The pound also clawed back 0.5% of strength from a weakening US dollar.
Edward Park, deputy chief investment officer at investment firm Brooks Macdonald, said of the rate cut stimulus: “This proactive and substantial cut ahead of the meeting is a sign of strong intent to support the economy.
“The FOMC statement was at pains to stress that the US economy remains strong however the fact that the central bank enacted 0.5% of cuts so soon after the call of G7 Finance minsters shows a desire to provide shock and awe stimulus.”