Citing the economic risks posed by the evolving COVID-19 outbreak, the Federal Reserve announced an emergency rate cut on Tuesday, slashing half a percentage point from its benchmark rate.
“We’ve been carefully monitoring the situation since it first became known and waiting to see how it would evolve,” Federal Reserve Chairman Jerome Powell said at a press conference after the rate cut was announced. “We’ve come to the view now that it is time to act in support of the economy.”
It was the first emergency cut outside of a scheduled policy meeting since late 2008, shortly after Lehman Brothers declared bankruptcy. It also represented a stark change in direction, considering the Fed had previously projected no rate changes in 2020.
Still, the Fed’s statement underscored that “the fundamentals of the U.S. economy remain strong” and that the Fed “is closely monitoring developments and their implications for the economic outlook.”
The so-called “corona cut,” which brought the target range for the federal funds rate to about 1.25%, was a unanimous decision by Federal Open Market Committee, the committee within the Fed that essentially oversees national monetary policy.
“We do recognize a rate cut will not reduce the rate of infection,” Powell said. “It won’t fix a broken supply chain. We get that.
“We don’t think we have all the answers, but we do believe that our action will provide a meaningful boost to the economy.”
The cut initially helped to boost stocks, with the Dow jumping nearly 700 points after the announcement. But the positive effect was short-lived, with the Dow again plummeting to end the day down 786 points, a decline of nearly 3%.
With coronavirus — and the already volatile state of the financial market — clearly on the minds of policy officials, the Mortgage Bankers Association (MBA) acknowledged that the outbreak could have both positive and negative impacts for current homeowners and potential homebuyers.
“Long-term, further spread of the virus would likely dampen consumer confidence and spending, and ultimately slow economic growth,” said Joel Kan, the MBA’s associate vice president of economic and industry forecasting.
“The 10-year Treasury has fallen to an all-time low over the past week, bringing mortgage rates down with it. If Treasury rates decline further, it is likely that mortgage rates will follow, giving more homeowners the incentive to refinance. For prospective buyers, low rates boost purchasing power, although some may also pause their home search given the uncertainty.”