The Federal Reserve cut its benchmark interest rate by 50 basis points after an emergency meeting March 3, pledging to support the U.S. economy as the spread of the coronavirus continues to threaten its expansion.
The coronavirus will "surely weigh on economic activity" in the U.S. and abroad for some time, and it is already hampering the tourism industry and disrupting global supply chains, Fed Chairman Jerome Powell said at a news conference after the decision.
The "ultimate solutions to this challenge" will come from health officials and other authorities, but the Fed "can and will do our part" to support the U.S. economy, Powell said.
"We do recognize that a rate cut will not reduce the rate of infection. It won't fix a broken supply chain. We get that. We don't think we have all the answers," he told reporters. "But we do believe that our action will provide a meaningful boost to the economy."
The unanimous decision puts the Fed's benchmark federal funds rate at a target range of 1% to 1.25%. The Federal Open Market Committee took the action at an unscheduled meeting, marking its first emergency cut since the financial crisis.
Fed officials said in their statement that the "fundamentals of the U.S. economy remain strong" but that the coronavirus poses evolving risks to the economic outlook. The virus has led to more than 3,000 deaths and infected about 92,000 people worldwide, according to data compiled by Johns Hopkins University's Center for Systems Science and Engineering.
"I don't think anybody knows how long it will be," Powell said when asked how the economy will recover from any potential coronavirus hit. "I do know that the U.S. economy is strong, and we will get to the other side of this."
Although the action has its limits, the rate cut should boost investor confidence after last week, when U.S. equity markets experienced their worst week since the 2008 financial crisis, said Quincy Krosby, chief market strategist at Prudential Financial. The three main indexes had slid into correction territory on Feb. 27, though Wall Street rebounded March 2 as investors got hints from Powell and other top central bankers that they may provide monetary stimulus.
"What this is meant to do is provide confidence that the Fed is monitoring this and prepared to act," Krosby said.
The rate cut is not a "panacea," but it should help avoid a tightening of credit conditions and will lower the cost of capital for businesses and households, which already are seeing cheaper borrowing rates after the Fed eased policy three times in 2019, Krosby said.
The unscheduled action was "consistent with [a] 'shock and awe'" approach, wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, in a note to clients. Focus will now shift to the FOMC's March 17-18 meeting, he added.
"Did the Fed lock themselves into another potential cut then? Powell hopes not, but investors will skew the odds differently if history is any guide," he wrote.
Stocks seesawed immediately after the Fed's announcement. The S&P 500 index was trading 0.68% lower at 12:03 p.m. ET, while the Dow Jones Industrial Average was down 1%, and the Nasdaq Composite had lost 0.61%.