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Will Fed’s interest rate cut set off domino effect?

Posted March. 05, 2020 08:24,   

Updated March. 05, 2020 08:24


The U.S. Federal Reserve has cut interest rates by 0.50 percentage point without prior notice. This is the first emergency interest rate cut and the biggest single cut since the 2008 global financial crisis. The novel coronavirus outbreak appears to have taken a toll on the U.S., a prop of the global economy, as well.

The Fed said in a statement on Tuesday local time that the Federal Open Market Committee (FOMC) reduced its key interest rate by 0.50 percentage point to a range of 1.00-1.25. It is a surprise decision made ahead of the regular FOMC meeting slated for March 18. In a press conference held after the stock market opening, Fed Chairman Jerome Powell talked about the impact of the coronavirus, saying the virus “will surely weigh on economic activity both here and abroad for some time.”

After the global financial crisis, the Fed has adjusted its key interest rate gradually by 0.25 percentage point under the principle of former Chairman Greenspan’s Baby Step. The fact that the Fed has broken the principle in 12 years suggests the huge impact of the novel coronavirus on the U.S. economy.

But stocks plunged despite the Fed’s interest rate cut. The Dow Jones Industrial Average dropped 2.94%, the S&P lost 2.81%, and the Nasdaq Composite fell 2.99%. CNBC’s Mad Money host Jim Cramer said the interest rate cut made him feel, “Wow, the weakness must be much more than I thought” and made investors worried about the impact of coronavirus, suggesting that the Fed’s efforts to revive the market backfired. Some experts point out that monetary policies do not directly affect disruptions in global supply chain and production, and weak consumption caused by the spread of the novel coronavirus.

But expectations are growing that the Fed’s interest rate cut will expedite policy coordination between countries, thereby stimulating the economy. “We reaffirm our commitment to use all appropriate policy tools,” finance ministers and governors of Group of Seven (G7) countries said in a joint statement following their conference call on Tuesday. “G7 finance ministers are ready to take actions, including fiscal measures.” But some argue that fiscal policies will be more effective than interest rate cuts given that Europe and Japan already have negative interest rates.

Meanwhile, Asian countries have already implemented pump-priming measures to deal with the situation. China, the epicenter of the novel coronavirus outbreak, practically cut interest rates by lowering its lending rates. Hong Kong announced its budget plan to award 10,000 Hong Kong dollars (approx. 1.55 million won) to its permanent residents. Singapore introduced a tax reduction plan for companies hit by the coronavirus outbreak, while Italy, the hardest hit country in Europe, is planning to inject money into its economy to respond to economic downturn.

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