FOMC Cuts Policy Rates By 0.50% In a Rare Inter-meeting Move

Gary Pzegeo, CFA
March 03, 2020

The Federal Reserve announced an unscheduled rate cut of 50 basis points.

The Federal Reserve surprised markets with the timing of its 50 basis point emergency rate cut.  The sell-off in equities over the past few weeks led markets to expect a monetary response, including more than one rate cut by the next scheduled meeting on March 18th.  Voting for the cut was unanimous and it followed a somewhat disappointing release from G-7 Finance Ministers and Central Bankers earlier in the day.  The FOMC release accompanying today’s cut follows:

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.

The immediate market reaction was positive for risky assets, but that quickly gave way to concern over both the aggressiveness of the move and effectiveness of monetary policy in the current situation.  Markets now anticipate the Fed’s policy rate dropping to less than 0.50% by the end of 2020.  The flight to U.S. Treasuries continued unabated with 10-year yields falling below 1% for the first time ever. 

In a press conference following the announcement, Chairman Powell reiterated that the Fed would “act as appropriate” in the face of risks from the coronavirus that will weigh on activity “for some time.” 

The cut obviously does nothing to directly blunt the spread of the virus, but it is a way for the Fed to reverse tightening imposed on the economy by financial markets and an attempt to avoid further disruption from poor liquidity or credit market freezes.  While the immediate market reaction is negative, we expect this to be the first of a coordinated set of global rate cuts and potential fiscal stimulus targeted at minimizing downside economic risks associated with the virus.

View the full FOMC statement.

 

Gary Pzegeo joined the firm in 2007 as head of fixed income, focusing on portfolio management, trading, policy formulation and client service.