The Econ-versation: The stock market’s response to an emergency Fed rate cut

Silvia Buonocore, Senior Writer

The U.S. stock market and the yield on the 10-year Treasury note dropped on Tuesday, March 3 following an emergency Federal Reserve rate cut of half a percentage point. Specifically, the S&P 500 fell by 2.81%, while the yield on the 10-year Treasury note fell below 1% for the first time ever.

The drop in the federal funds rate is meant to boost investment as well as consumer and business confidence. However, in this case, it simply confirmed investors’ fears that the economy is weakening as a result of the coronavirus.

Not only does the coronavirus pose a threat to the stock and bond markets, but the virus also has the ability to harm other facets of the economy. With increases in travel bans, temporary closing of factories and disruption to supply chains, corporate profits are expected to decline. The combination of these factors led economists to curtail predictions for future economic growth.

The Federal Reserve target rate cut can only go so far since the coronavirus is the true culprit in current economic issues. More specifically, many of the effects of the coronavirus concern disrupted supply chains and factory delays, which the power of a rate cut does not extend to. Nonetheless, the logic behind the rate cut is that early action may mitigate potential future shocks to the economy.

In the meantime, many countries have agreed to cooperate to prevent further economic damage. Countries such as Australia and Malaysia have cut their target interest rates, with Canada planning to do so as well. Furthermore, some countries are turning to fiscal policy — the increase in government spending and a decrease in taxes — as an additional method to boost the economy. Some economists are recommending that the United States also implement fiscal policy if the target rate cut proves ineffective.

For the time being, the cut in the target interest rate will keep borrowing costs low in an effort to stimulate investment in the economy. The Federal Reserve’s next meeting is scheduled for mid-March in which it may cut the target rate further, depending on the future state of the economy and the spread of the coronavirus.

This information originally appeared in The New York Times and The Wall Street Journal.

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