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United States Monetary Policy March 2020

United States: Fed cuts rates at unplanned meeting amid spreading coronavirus risks

On 3 March, the FOMC voted to cut the target range for the federal funds rate 50 basis points to 1.00%–1.25%. The move comes on the heels of Fed Chair Jerome Powell’s statement on 28 February that the Fed was assessing the risks of the virus and stood ready to react to any economic fallout from the epidemic. The emergency response fell between the Federal Reserve’s Open Market Committee’s scheduled January and mid-March meetings.

The move is particularly noteworthy as it marks the first time the Bank reacted to global developments outside of its set meeting schedule since the Financial Crisis in 2008. Moreover, the FOMC slashed rates by more than the standard 25 percentage-point increments it characteristically moves by in its policy adjustments.

Given the rapidly changing external environment due to the coronavirus epidemic, it is uncertain if this cut will be a one-off pre-emptive move or whether the Fed has additional rate cuts in store for its 17–18 March meeting. At the accompanying press conference, Powell noted that “the magnitude and persistence of the overall effects [of the virus] on the economy remain highly uncertain and the situation remains a fluid one”, and left the door open for further easing by stressing “we can and will do our part to keep the economy strong”.

Commenting on the outlook, economists at Goldman Sachs, stated:

“The near-term policy implications were somewhat ambiguous, but in our view, the press conference was consistent with further Fed easing in coming months. We retain our forecast of another 50bp but are now penciling in 25bp moves on March 18 and April 29 (versus April and June previously).”

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