AAM Comments on the Federal Reserve’s Rate Cut

In a surprise move, the Federal Reserve this morning cut the Federal Funds target range by 50 basis points to 1.00%  – 1.25%. Although the markets had been pricing in rate cuts from the Fed to help ease concerns from investors due to the spread of the coronavirus, most economists believed the Fed would wait until their scheduled meetings to take action. Today’s action from the Fed was the first emergency move since the 2008 financial crisis.

So why did the Fed cut rates? During a press conference following the rate cut, Fed chairman Jerome Powell said “the action was taken to keep the U.S. economy strong in the face of new risks to the economic outlook”. The move was surprising given that as recently as last week, some Fed officials thought it was too soon to respond to the virus. Today’s vote to lower rates was unanimous. 

Investors appear skeptical that today’s action from the Fed will be effective. Equity markets briefly moved higher following the rate cut but are currently in the red. Treasury yields have moved significantly lower across the curve.

Bottom Line:

Global economic activity is being pressured due to supply-chain disruptions and challenges in end-market demand and it’s unclear on how lower rates will help. The Fed is hoping that by cutting rates, they will help support consumer and business sentiment and ease financial conditions. 

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