(Associated Press) Federal Reserve Chairman Jerome Powell sought to calm fears Friday over the viral outbreak by issuing a rare statement of reassurance that the Fed will “use our tools” to support the economy — a strong signal of a coming interest rate cut.
The stock market has plummeted 13% this week over widespread concerns that the coronavirus will become a global pandemic that could drive the U.S. and global economies into recession. Businesses large and small are already reporting drops in revenue and profits as companies and consumers cancel vacations and business trips.
Many economists caution, though, that rate cuts and other Fed economic tools might not do much to blunt the economic damage resulting from the virus.
“The fundamentals of the U.S. economy remain strong,” Powell said in a statement. “However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
Such statements from the Fed are unusual and tend to come during crises that cause widespread fears in financial markets. Similar comments were issued after the October 1987 market crash and after the Sept. 11, 2001, terrorist attacks.
“Powell’s statement is a strong signal that the Fed is about to cut rates, and it is highly likely that this will be a series of cuts,” said Sung Won Sohn, an economics and finance professor at Loyola Marymount University in Los Angeles.
Many economists have urged rate cuts to help allay anxieties and support the economy and markets. Economists from Bank of America said Friday that they expect the Fed to cut its benchmark short-term rate by a half-percentage point at its March meeting, which would be twice the typical size of a cut and the largest since the Great Recession.
Investors are increasingly envisioning that the Fed will act soon. On Friday afternoon, traders priced in a 100% likelihood that the central bank would make at least a quarter-point cut in March, according to the Chicago Mercantile Exchange’s Fedwatch tool. The odds of a half-point cut were just above 50%. That’s up sharply from a week a week ago, when the likelihood of a modest quarter-point cut was put at 11%.
Stocks remained volatile after Powell’s mid-afternoon statement, though they rallied toward the close of trading. The Dow Jones Industrial Average finished down 357 points after having briefly been done more than 1,000.
It’s unclear what economic benefit a Fed rate cut, even a sizable one, might provide. The main economic consequence of the viral outbreak so far is the disruption of global manufacturing supply chains in China, South Korea and Japan, all of which have been hit by the disease. Lower interest rates wouldn’t be able to repair those breakdowns, especially because global borrowing rates are already ultra-low.
Lower rates typically encourage consumers to borrow and spend more. But if the COVID-19 becomes a global pandemic that forces widespread quarantines and closes businesses and restaurants, looser credit might not do much to improve confidence and economic activity.
Still, Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, said rate cuts could help the economy by soothing financial markets as well as by supporting lending. Many highly indebted companies might face higher borrowing costs if the economy slows, and a Fed rate cut could offset that effect. Corporations have shied away from issuing new bonds this week, she said, fearing that they would have to pay higher rates.
And plunging stock markets can also lower consumer confidence and reduce spending, even among Americans who don’t own shares. That could weaken the economy.
A rate cut would “calm the financial markets” and show “the Fed is not turning a deaf ear to the turmoil,” Bostjancic said.
Late Friday, President Donald Trump, a frequent critic of the Fed for not cutting rates more aggressively, was asked about the topic.
“I hope the Fed gets involved, and I hope they get involved soon,” Trump said on the White House lawn.