COVID-19

In emergency move, Fed cuts interest rates by 0.5%

David Brancaccio Mar 3, 2020
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An interest rate cut that occurs between formal policy meetings is highly unusual. Sarah Silbiger/Getty Images
COVID-19

In emergency move, Fed cuts interest rates by 0.5%

David Brancaccio Mar 3, 2020
An interest rate cut that occurs between formal policy meetings is highly unusual. Sarah Silbiger/Getty Images
HTML EMBED:
COPY

The Federal Reserve this morning cut interest rates by half a percentage point. For this to happen between formal policy meetings is highly unusual and an indication of the emergency driving the decision.

What’s called the “federal funds rate,” the main way central bankers add or remove liquidity into the financial system, was already low, and now it will be managed to stay between just 1% and 1.25%.

The Fed’s policymaking committee was unanimous in its decision. The Fed says it will continue to closely monitor the COVID-19 outbreak and use appropriate tools to support the economy.

To make sense of the cut, we spoke with Karen Petrou, managing partner of the Washington-based economic consulting firm Federal Financial Analytics.

David Brancaccio: OK, surprise. Not even after a scheduled meeting of Fed policymakers. Are you reassured they’re taking action, or maybe scared they even had to do this?

Karen Petrou: I’m troubled that they did, because I really think that the Fed is responding not to the economy, let alone to any kind of liquidity concerns or structural stress, but to the market. And I really hate to see the central bank continue to exercise what used to be called the “Greenspan put,” now it’s become the “Powell put” — that when markets are shaky, the Fed steps in and rescues the traders. That’s not what a central bank is for.

Brancaccio: Yeah, because now the traders are going to know the Fed is watching their back very closely.

Petrou: And a market that runs on moral hazard runs on fumes. I would like to see some market recognition of — we’re supposed to have efficient markets with traders recognizing forward-looking values. That’s not what we’re doing. Everybody’s trading on the Fed. And that is, ultimately, a dangerous game.

Brancaccio: And you’ve had some questions about whether or not cutting interest rates actually helps the problem at hand, which is trying to help the world economy through concerns about the coronavirus.

Petrou: I think it has virtually nothing to do with it. Unless the Fed figures out how to get in the face mask manufacturing business, or figures out a way to buy tons of copper to support the supply chain. What the Fed is supposed to do is supply liquidity to the financial market and ensure a stable economy, by way of maximum employment and price stability. At this point, there’s no reason to intervene. Now I know people will argue, “Well, you need to intervene early because it takes a while for monetary policy to transit through the economy.” But the problem is the economy’s problems have nothing to do with the cost of money, which is already at extra record lows. It has to do with real world contagion and a virus. A half a point is not going to cure anybody.

Clarification (March 3, 2020): This story has been updated to more clearly describe the nature of the rate cut.

COVID-19 Economy FAQs

What’s the latest on the extra COVID-19 unemployment benefits?

As of now, those $600-a-week payments will stop at the end of July. For many, unemployment payments have been a lifeline, but one that is about to end, if nothing changes. The debate over whether or not to extend these benefits continues among lawmakers.

With a spike in the number of COVID-19 cases, are restaurants and bars shutting back down?

The latest jobs report shows that 4.8 million Americans went back to work in June. More than 30% of those job gains were from bars and restaurants. But those industries are in trouble again. For example, because of the steep rise in COVID-19 cases in Texas, Gov. Greg Abbott, a Republican, increased restrictions on restaurant capacities and closed bars. It’s created a logistical nightmare.

Which businesses got Paycheck Protection Program loans?

The numbers are in — well, at least in part. The federal government has released the names of companies that received loans of $150,000 or more through the Paycheck Protection Program.

Some of the companies people are surprised got loans include Kanye West’s fashion line, Yeezy, TGI Fridays and P.F. Chang’s. The companies you might not recognize, particularly some smaller businesses, were able to hire back staff or partially reopen thanks to the loans.

You can find answers to more questions on unemployment benefits and COVID-19 here.

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