FOMC Chair Powell answers a reporter's question at the March 3, 2020 press conference.
In an emergency meeting of the FOMC yesterday, it was decided that the main interest rate in the US is going to be cut by half a percentage point to 1.25 per cent, in a bid to curb the negative impact of the coronavirus on the US economy.
The decision is justified by the Committee's practise of utilising monetary policy as insurance against highly volatile and external pressures.
Previously, Jerome Powell, the FED Chair, had used looser monetary policy to negate the negative impact of the general uncertainty that was looming over the markets from the US/China trade war.
The 0.50 per cent reduction this time is a comparatively large cut, which was perceived as an indication by the market that the FED is scared of the potential long-lasting ramifications of the virus on the fragile economy.
Some market experts have even gone as far as to call this a “desperate move” on the part of the Committee, which would suggest that its members are at the end of the rope and there is not much room to navigate.
Regardless, in the post-decision statement, the tone of the FOMC did not sound desperate but rather reassuring:
“The fundamentals of the U.S. 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 decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1 1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”
Even with these consolations, however, the market reacted sharply to the news. The 10-year US Government Bond’s yield fell below 1 per cent for the first time ever, which is quite illustrative of investors’ uneasiness at the moment.
US10Y vs S&P 500. Image source: Trendsharks ©, created with TradingView.com
The S&P 500 tanked by nearly 3 per cent during yesterday's trading session, which wiped out a considerable chunk of the recent bullish correction that was initiated on Monday following last week's major selloff.
Meanwhile, the euro has surpassed the dollar as the new go-to currency at times of market unrest, as the EURUSD continued to surge for the 4th consecutive day yesterday.
The pair is currently testing the strength of the major resistance level at 1.11700.
EURUSD 1D Price Chart. Image source: Trendsharks ©, created with TradingView.com
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