Fri, Aug 12, 2022 @ 21:28 GMT
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FOMC Makes Intra-Meeting 50 Basis Point Cut on COVID-19 Concerns

  • The Federal Reserve made an emergency intra-meeting rate cut this morning due to increased concerns about the fallout from Covid-19 on the global and U.S. economy. The Fed lowered the target range for the federal funds rate half a point to 1.00% to 1.25%.
  • The one-paragraph statement was short on details. It began by pointing out that the fundamentals of the U.S. economy “remain strong”. It went on to say, “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”.
  • The decision to cut rates was unanimous.

Key Implications

  • This was certainly a surprise move, particularly given the Fed has a scheduled meeting in short order on March 18th. This reflects their willingness to move swiftly and decisively in the face of tightening financial conditions, which lends credibility to the Fed’s position to ‘act as appropriate’. If virus risks do not subside, we would expect the Fed to remain proactive; however, as noted by morning’s G7 statement, the responsibility does not rest solely with central banks, as governments and fiscal policy have an active role to play as well.
  • This morning we released an updated financial forecast that embedded an expectation of two 25 basis point cuts, but not all in one go. As we discussed in a perspective yesterday, COVID-19 is expected to be a significant hit to economic growth in the first half of 2020. As it turned out, the Fed wasted no time in deciding that an ounce of prevention is worth a pound of cure when it comes to these downside risks. This is consistent with Fed research that has pointed out that when rates are close to the zero lower bound, central banks need to be pro-active in the face of shocks, given that monetary policy takes time to affect the economy.
  • While the disease has not spread widely domestically, businesses are feeling the effects on their supply chains, and combined with the dramatic move in financial markets and the inversion of the yield curve in particular, led the Fed to take action. The tightening in financial conditions risked undermining sentiment and worsening demand-side impacts. This is where central banks have historically been quick to help, and the Fed followed that pattern.
  • Lower rates should help boost the economy by providing a cushion to businesses that have seen their revenues hit by the impact of the virus, and it will add fuel to the housing market, which has already seen renewed momentum thanks to last year’s cuts.
  • We will get more details from Chair Powell in a press conference at 11am.
TD Bank Financial Group
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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