Will rate cuts ease financial conditions for struggling firms, and help the world economy recover once the virus is under control?
IT IS the first time that the Federal Reserve, America’s central bank, has cut rates between meetings since 2008. Then it was in response to the collapse of Lehman Brothers, an investment bank. This time, on March 3rd, it was because of the “evolving risks to economic activity” from the coronavirus.
His comments suggested the short-term outlook for economic activity was gloomy. The S&P 500 closed down 2.8%; the yield on ten-year Treasury bonds fell to just below 1%, a record low. Spreads on high-yield bonds remain elevated, indicating concerns about the financial health of some highly indebted firms.
What made the Fed’s move more remarkable, though, was that it came during the longest economic expansion in American history, with the current boom beginning in June 2009. Normally at this late stage in a growth cycle central banks push up rates to head off rising prices, but annual inflation in America was just 1.7% in January. The Fed had begun trying to tighten monetary policy back in December 2015; rates eventually reached a high of 2.25-2.5% three years later.
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