WASHINGTON, D.C. – Federal Reserve Chairman Jerome Powell sought to calm fears Friday over the viral outbreak by issuing a rare statement of reassurance that the Fed will “use our tools" to support the economy — a strong signal of a coming interest rate cut.
The stock market has plummeted 13% this week over widespread concerns that the coronavirus will become a global pandemic that could drive the U.S. and global economies into recession. Businesses large and small are already reporting drops in revenue and profits as companies and consumers cancel vacations and business trips.
Many economists caution, though, that rate cuts and other Fed economic tools might not do much to blunt the economic damage resulting from the virus.
“The fundamentals of the U.S. economy remain strong,” Powell said in a statement. “However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
Such statements from the Fed are unusual and tend to come during crises that cause widespread fears in financial markets. Similar comments were issued after the October 1987 market crash and after the Sept. 11, 2001, terrorist attacks.
"Powell’s statement is a strong signal that the Fed is about to cut rates, and it is highly likely that this will be a series of cuts,” said Sung Won Sohn, an economics and finance professor at Loyola Marymount University in Los Angeles.
Many economists have urged rate cuts to help allay anxieties and support the economy and markets. Economists from Bank of America said Friday that they expect the Fed to cut its benchmark short-term rate by a half-percentage point at its March meeting, which would be twice the typical size of a cut and the largest since the Great Recession.
Investors are increasingly envisioning that the Fed will act soon. On Friday afternoon, traders priced in a 100% likelihood that the central bank would make at least a quarter-point cut in March, according to the Chicago Mercantile Exchange's Fedwatch tool. The odds of a half-point cut were just above 50%. That's up sharply from a week a week ago, when the likelihood of a modest quarter-point cut was put at 11%.