President Donald Trump stepped-up pressure on the Federal Reserve Tuesday, calling on Chairman Jerome Powell 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.
Trump accused Powell and his colleagues of "being wrong from day one", repeating his view that the U.S. should have the lowest borrowing rates in the world and that a strong dollar puts exporters at a disadvantage in international markets.
The pressure followed overnight rate cuts from both the Reserve Bank of Australia, which clipped its key lending rate to an all-time low of 0.5%, and a late Monday statement from the European Central Ban, which pledged 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".
Similar statements have been issued over the past three days from the Bank of England, the Bank of Japan, and the Federal Reserve itself, which stated late Friday that it is "closely monitoring developments and their implications for the economic outlook" and will "use our tools and act as appropriate to support the economy."0
Bond traders, however, are already pricing in a 100% chance of a 50 basis point rate cut from the Fed when it meets later this month in Washington, according to CME Group futures prices, while analysts at Goldman Sachs think the central bank could act even before the March 18 meeting.
Powell, in fact, will co-chair an emergency meeting of G-7 finance ministers and central bankers at 7:00 am Eastern time Tuesday, alongside Treasury Secretary Steve Mnuchin, that could deliver a coordinated move lower in rates in order to cushion the coronavirus blow.
The the Organisation for Economic Cooperation and Development said Monday that global growth could slow by half a percentage point, to 2.4%, a rate that would mark the weakest expansion since 2009. A broader coronavirus spread, the OECD warned, could take that tally to just 1.5%.
There was already a (relatively modest) supply shock as supply chains faced disruption due to factory closures in China and other parts of Asia, but over the past couple of weeks this has increasingly turned into a financial shock as bond yields and equities plunge," said ING's chief international economist James Knightley. "The concern is that the fear factor surrounding Covid-19 will change corporate and consumer behaviour and lead to a demand shock as well."
"We doubt it will trigger a meaningful boost to aggregate demand, but implementing rate cuts should help to mitigate some of the strains in the financial system, particularly if it is accompanied by additional liquidity/credit measures," he added.