Federal Reserve Cuts Rates by 50 Basis Points Amid 'Evolving Coronavirus Risks'

Stocks surge, then retreat as the Fed delivers an emergency rate cut to counter what it calls "evolving risks" linked to the coronavirus.
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The Federal Reserve cut its benchmark lending rate by 50 basis points Tuesday in a surprise decision designed to cushion the economic impact of the coronavirus just hours after a meeting of G-7 finance ministers and central bankers.

The move, which was unanimously agreed by all voting Governors, clips the Fed Funds rate to a range of 1% to 1.25% and follows an emergency meeting of G-7 finance ministers and central bankers earlier in the pre-market trading session. It's the biggest rate cut since the fall of 2008 and the first emergency rate move since the global financial crisis.

“The coronavirus poses evolving risks to economic activity,” the central bank said in a statement issued alongside the rate cut. “In light of risks and in support of achieving maximum employment and price stability goals, lower the target range for the federal funds rate.”

The Dow Jones Industrial Average surged more than 500 points immediately following the rate move, lifting the benchmark to a 300 point session gain following yesterday's 1,300 point surge, before paring that gain to trade 475 points lower by 11:30 am Eastern time. The broader S&P 500 was also marked 37 points higher following the rate move, but slipped to a 51 point decline.

Benchmark 10-year Treasury bond yields, meanwhile, rallied to a fresh record low of 1.026% while 2-year note yields traded at 0.74%. The U.S. dollar index, which tracks the greenback against a basket of six global currencies, fell 40 pips on the session to 97.014.

The rate move follows a series of Tweets from President Donald Trump, who urged the central bank to deliver a "big" rate cut in order to keep pace with central banks around the world in reacting to the economic threat from the coronavirus.

Earlier Tuesday, Finance ministers and central bankers from the G-7 pledged  to "closely monitor" financial market developments amid the current coronavirus crisis, but stopped short of offering specific coordinated policy action to cushion the impact on the world's most-developed economies.

In a statement released following an emergency conference call among the G-7 members, co-chair by U.S. Treasury Secretary Steve Mnuchin and Federal Reserve Chairman Jerome Powell, the leaders said they "stand ready" to cooperate further on timely and effective measures", including fiscal tools, but made no mention of interest rate reductions. It was only the fourth emergency meeting of the G-7 leaders since the 2001 terrorist attacks on New York and Washington.

"Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks," the statement said. "Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase."

Coronavirus cases have been accelerating at a rate that is eight times faster outside of China -- the epicenter of the outbreak -- than inside, with the number of non-China infections now estimated at nearly 11,000.

The Reserve Bank of Australia cut its key lending rate to a record low 0.5% overnight in an effort to ensure that China's impending slowdown from the virus will have a limited impact on its domestic economy.

The European Central Bank also vowed ready to take "appropriate and targeted measures" to fend off what President Christine Lagarde called a "fast developing situation, which creates risks for the economic outlook and the functioning of financial markets" in a late Monday statement.