Last updated on May 13th, 2020
In a preemptive move to assuage fears about the economy in the face of a coronavirus pandemic, the Federal Reserve has cut interest rates by half a percentage point.
This announcement marks the single biggest rate cut since 2008. The cut of 50 basis points to the benchmark interest rate comes as unease over the economic effects of the novel coronavirus spreads. After the announcement, stocks rallied sharply – but backed off in volatile trading. The dollar fell by 0.4% against other global currencies, too.
Based on this emergency rate cut, experts are predicting a further drop to the benchmark interest rate after the next meeting of the Federal Open Market Committee (FOMC). That meeting is scheduled for March 17-18, 2020. The FOMC has made rate cuts in the past; however, a cut due to a pandemic is unprecedented in recent history.
Coronavirus and the Economy
Experts agree that COVID-19 (AKA coronavirus) could disrupt the U.S. economy in ways not yet fully grasped. Unease in the United States has continued to grow. With it, a rising number of U.S. coronavirus cases, along with a rising death toll, have fueled this tension.
When it comes to the economy, the U.S. is closely watching effects in other countries, like China. The epicenter of the pandemic has already seen its economy suffer due to the closing of factories in multiple cities. Quarantine measures have affected factory output, the service sector has slowed, and domestic and export orders have dropped. This has wreaked havoc on China’s Purchasing Manager’s Index (PMI).
Fears of a similar situation in the U.S. are beginning to affect the stock market, prompting action from the FOMC. Americans worry that they will not be able to work or earn the wages they need. Tourism is expected to also take a hit due to curtailed travel both domestically and internationally.
The global economy has already slowed due to this virus. It’s expected that the U.S. economy will follow suit, due in part to a lockdown of imports and exports. In fact, U.S. shipping demand was faltering even before coronavirus restrictions disrupted global supply chains. The pandemic has put further strain on U.S. shipping.
The Federal Reserve is Also Keeping an Eye on Coronavirus
These factors, along with other concerns, have led to the Fed’s decision to cut interest rates by 50 basis points. Americans can expect to see more announcements regarding COVID-19’s effect on the economy, travel, and daily life over the next few weeks. As for the effects to the U.S. economy, time will tell. In the meantime, FOMC chair, Jerome Powell, and the Federal Reserve will continue to assess the situation.