Friday, April 3
Shadow

Corona virus: the Fed slashes its key rate

Corona virus, Coronavirus

(Washington) The US Federal Reserve announced a 0.5 percentage point cut in rates on Tuesday, an emergency decision due to the risks posed to the economy by the spread of the new corona virus and under repeated pressure from Donald Trump.

“In light of these constantly evolving risks,” the Fed “today decided to cut rates by half a percentage point,” she said in a statement released shortly after a meeting of ministers. Finance and central bankers of the G7, from which no concrete announcement had come out.

This decision, taken outside the usual calendar of monetary meetings, was taken unanimously. It is a first since the 2008 financial crisis.

President Donald Trump once again lambasted the central bank in a tweet, saying it was not going far enough and urged further cuts.

Fed rates are now in the range of 1% to 1.25%.  

The markets were not sure how to react to this news which had the effect of a bomb. The flagship index of the New York Stock Exchange fluctuated sharply, leaping before losing ground.

The Fed said it would “closely monitor” the impact of the coronavirus on the economy while stressing that “the fundamentals of the US economy remain solid.”  

This drop in rates is mainly intended to reassure the markets.  

Solid fundamentals

A telephone meeting of G7 finance ministers and central bankers on Tuesday morning had disappointed as no concrete announcement had come out. They simply promised to use “all the tools” necessary to support a global economy crippled by the new coronavirus.

The Fed press release makes no mention of concerted action.  

On Friday, in a rare press release, Fed chairman Jerome Powell had assured that the institution was ready to intervene if necessary in the face of the economic effects of the epidemic.

The American Central Bank had started a pause in December, leaving rates between 1.50 and 1.75% after three straight cuts in 2019. And Jerome Powell had previously estimated that interest rates were at the right level level.

But the situation changed at the beginning of last week when the new coronavirus that left China in December began to spread like wildfire to the rest of the world.

This cut in rates had been demanded for a long time by the American president, who was accustomed to attacks on the Fed.

In the night of Monday to Tuesday, he had also pointed out in a tweet that the Australian Central Bank had lowered its interest rates and that it would further loosen its monetary policy to compensate for the situation and the slowdown of the coronavirus in China.  

“They fell to 0.5%, a record level. Other countries are doing the same thing, if not more. Our Federal Reserve makes us pay higher rates than many others, when we should pay less, ”said the president.

The epidemic of the COVID-19 virus paralyzes whole swathes of the economy of dozens of countries, mainly China, with the closure of factories, schools, flight cancellations, conferences, fairs and sports meetings or even the ban on large gatherings.

According to the OECD, global growth should not exceed 2.4% this year while the international organization was still counting on 2.9% before the epidemic, which was already the lowest level since the financial crisis of 2008 -2009.

In China, growth could fall to 4.9% from its lowest level since 1990.

Worldwide there are more than 92,000 cases, including 3,127 deaths and 77 countries and territories are affected, according to a report established by AFP from official sources Tuesday at 6 am.

In the red for the start of 2020

Does the coronavirus (COVID-19) threaten the growth of the world economy? Yes, says the Organization for Economic Co-operation and Development (OECD) in a report released Monday. According to the OECD, COVID-19 is already causing “major economic disruption”. For the first three months of 2020, the growth of the world economy “could be negative”, warns the organization, which revised its growth forecast from 2.9% to 2.4% for the world economy in 2020 That is on condition that the epidemic reaches its peak in China by the end of March and that it proves to be “more moderate and circumscribed” in the other countries. According to this scenario, Italy would probably go into recession (growth of 0% in 2020), while Japan (+ 0.2%) and Germany (+ 0.3%) would not be far off.