By acting decisively, the Fed apparently hoped to bolster confidence and to stabilize an economy that has been weakened by the coronavirus. It seemed an opportune moment to strike, because the stock market had rallied the day before. On Monday, the Dow Jones industrial average rose 5.1 percent, or 1,293.6 points. This offset about a third of the losses suffered in the previous seven trading sessions.
So the Fed gambled — and lost. The interest rate cut was announced at 10 a.m., and the market started to decline almost immediately. The Dow ended the day down 785.91 points, about 2.9 percent. The Standard & Poor’s 500 was off 2.8 percent, and the Nasdaq dropped 3 percent.
Just how the Fed’s interest rate cut might stimulate the U.S. economy is unclear. Normally, when the Fed reduces the fed funds rate (fed funds are short-term loans usually among banks), it’s assumed that rates on home mortgages, corporate bonds and car loans also drop. But these rates are already low. If people won’t eat out because they might contract a virus, will a half a percentage point on a loan convince them otherwise?
At a late-morning news briefing, a reporter asked “what changed between last week when many of your [Fed] colleagues seemed to indicate [that] it was still too soon to tell how this [virus] might influence the outlook … and today?”
Fed Chair Jerome H. Powell responded that “we have been carefully monitoring the situation ... [and] we have come to the view now that it is time for us to act in support of the economy, and once you reach that decision, we decided to go ahead.” There are more reports of trips being canceled, people shunning restaurants and factories running out of essential parts.
The simplest explanations for the market’s decline are that investors and traders are scared, fearing that the economic setbacks might be worse than expected.
In a report issued Monday, the Organization for Economic Cooperation and Development (OECD) — a group of advanced countries — cut its forecast for growth of the global economy in 2020 to 2.4 percent, down 0.5 percentage points from a prediction made in November. It warned that the economic slump could get worse.
The slump is clearly global in nature, with China as the epicenter. “The global economy has become substantially more interconnected,” the OECD said. In 2002, China’s economy was equal to 6 percent of the world economy; by 2019, it was 17 percent.
This means that when China’s troubles spread abroad, they have a bigger impact. China’s tourists, for example, account for about a tenth of all cross-border visitors, according to the OECD. They are also one quarter or more of visitors to Japan and South Korea. When they stay home — because they’re quarantined, or cautious — the impact is global.
Whatever happens, the Fed is almost certainly not finished with lower interest rates. The next meeting of the FOMC is scheduled for March 17 to 18.