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Is Fed’s 50bps rate cut a meaningful counter to Corona Virus impact?

3 March 2020

The Federal Reserve cut US base rate by 50bps on Tuesday 3 March, following an emergency meeting, in a move to help reduce the impact of the Corona virus on the US economy and markets.

Although a cut was priced in by markets, the size of the reduction has come as a surprise and follows sharp sell offs in the markets at the end of last week and the continuing spread of the virus in countries around the globe.

But commentators differ in their assessment of the potential beneficial impact of the rate cut.

Anna Stupnytska, head of Global Macro, Fidelity International, said: “Clearly, last week’s sharp market sell-off in light of coronavirus-related anxiety and the resulting tightening in financial conditions have forced the Fed to take a pre-emptive action to reassure the market — this is a strong signal from the policymakers.

“As the spread of the coronavirus continues and the chances of containment become slimmer, the impact on the global economy is likely to be sizeable. While easier monetary policy helps sentiment, central banks should not be acting in isolation – the governments should step in with fiscal measures that are timely and well designed, supporting the economies that struggle not just from the virus itself but also from preventative measures that, in some cases, have ground activity to a halt.

She added that it is likely other major central banks “will follow suit in a coordinated fashion,”and in its accompanying statement, the Fed “seems to leave the door open for further rate cuts if necessary”.

Seema Shah, chief strategist at Principal Global Investors, said: Coronavirus has certainly slammed US risk assets, but the impact on the US economy is still to be discerned – yet the threat is sufficiently large to prompt drastic Fed action.

“The surprise cut will deliver a confidence boost and should lead to an easing of financial conditions that had tightened sharply in recent weeks. But, beyond that, 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.

“The Fed will likely also face questions about what it does after the shock. If it proves to be temporary, as popular thinking suggests, will the central bank quickly withdraw the stimulus in order to avoid supercharging risk asset and inflating asset price bubbles? If rate cuts stay in place, equity vertigo could return with a vengeance. The Fed was already facing a dearth of policy options for the next recession, today’s move leaves it with almost no cushion and the economy with a limited safety net.

“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 Birrell, Chief Investment Officer at Premier Miton, said he did not expect the Fed’s rate cut to have much immediate impact on the economy “but investors will be encouraged by the positive action”.

Adrian Lowcock, head of personal investing at Willis Owen, concurred. He said: “The fact the US Federal Reserve have convened an emergency meeting means that they are very concerned about the impact coronavirus could have on the US and global economy.  However, the decision to cut interests has done nothing to quell market worries, and the reality is that it will have little effect. With interest rates already low further cuts may provide a small benefit to companies, but they cannot address the fundamental issues the global economy faces in dealing with the virus.

“Interest rates will not change the fact companies’ supply chains are being disrupted, nor will it encourage people to go out and spend. In addition, the action of the US cannot be followed by Europe or Japan, or indeed the UK, where rates are much lower.”

 

 

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