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Fed in emergency rate cut to combat coronavirus threat

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REUTERS

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The US Federal Reserve delivered an emergency half-percentage point interest rate cut yesterday in a bid to protect the economy from the spread of coronavirus, a day after the European Central Bank said it was “monitoring developments”.

The coronavirus poses evolving risks to economic activity,” the world’s most powerful central bank said in a statement.

“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 half a percentage point.”

The emergency cut was the first time since 2008 that the Fed has moved on interest rates outside of its regular schedule of meetings and brings the benchmark US interest rate to just 1.0-1.25pc.

“This Fed knows there is not a lot of room left between here and zero for the funds rate, so they need to be judicious in how they dole out the rate cuts,” said Steven Blitz, US economist at TS Lombard.

“There is a “go big or go home” guidebook for policy when near the lower bound, but the “book” inherently presumes lower interest rates save the day because it presumes a financial crisis first – not second,” Mr Blitz wrote in a research report.

New of the rate cut drove the euro higher against the dollar, pushing it above 1.12 for the first time since early January.

“Currency markets are now watching to see if other central banks will follow suit however with limited scope for monetary stimulus outside of the US, attention is centred around fiscal stimulus, particularly in Europe,” said Lee Evans, head of foreign exchange trading and strategy at Bank of Ireland.

The Fed acted hours after Powell and finance chiefs from the Group of Seven nations said they would “use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”

Mr Powell had trailed the potential for imminent Fed action in a speech on Friday.

While ECB chief Christine Lagarde has also indicated the bank could act swiftly if needed, decision making at the Frankfurt-based institution is complicated by the large number of rate setters on its decision-making committee.

The bank fell far behind the curve in its initial response to the Eurozone crisis a decade ago and was deeply split at its September meeting when it cut interest rates to a negative 0.5pc and restarted its bond purchases.

The next ECB policy meeting will take place on March 12 and that will be dominated by the impact assessment on the coronavirus outbreak.

“While the ECB is likely to stress downside risks to the outlook and reiterate its readiness to “adjust all of its instruments, as appropriate”, we think it will probably not deliver actual easing on 12 March, but – in the absence of more dramatic events – maintain a “wait-and-see” stance until the next meeting on 30 April,” said Reinhard Cluse, chief economist at investment bank UBS.

Online Editors


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