almost 4 years ago • 2 mins
With coronavirus putting the US economy on edge, the Federal Reserve (the Fed) announced an emergency cut to the country’s interest rates on Tuesday 🚑
The Fed suggested late last week it’d be willing to lower rates to help support the economy – and economists at Goldman Sachs followed up by predicting the bank’s cut would be bigger than usual. But what Goldman didn’t see coming was just how soon the Fed’s announcement would arrive. Perhaps the Fed simply didn’t want to waste any time moving forward with a rate cut that seemed pretty inevitable 🤷♂️ The central bank is, after all, responsible for maximizing employment and stabilizing prices, and both were under threat: an increasing number of people have been missing work, while food and medicine-stockpiling looks like it might trigger rising prices.
Investors are now more likely to expect coordinated rate cuts from the world’s other major economies (think the UK, Japan, and the eurozone). Not least because the G7 – only a few hours before the cut itself – was promising to do what it could to achieve “strong, sustainable” economic growth…
The Fed’s announcement initially sent the prices of stocks up around the world: lower US rates make the country’s stocks more appealing, since investors won’t earn as much on relatively safe investments like new government bonds (whose interest rates are partly based on the Fed’s rate) 🏦 Investors also bought up existing bonds that offered higher returns, which in turn pushed their yields even lower.
Remember, we haven’t actually seen any economic growth figures since the outbreak took hold. That means this pre-emptive central bank action – which won’t leave it much wiggle room when there’s eventually a recession – could backfire. There have already been warning signs aplenty, and it could put added pressure on governments to boost their respective economies with “fiscal stimulus” – that is, infrastructure spending, tax cuts, and so on.
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