Coronavirus Worries the Fed

Written by Jennifer Clark
Posted March 4, 2020

If the U.S. stock market's reaction to the spread of coronavirus (also known as COVID-19) last week didn’t give investors enough of a reason to be skeptical, now the Federal Reserve has taken measures to combat the virus' potential impact on the economy. 

On Tuesday, the Fed decided to cut interest rates in an emergency response to COVID-19. This comes in between the regularly scheduled policy meetings, which sounds an alarm. 

The half-a-percentage-point cut comes in anticipation of an economic slowdown due to the virus. On Tuesday, the central bank said in a statement, “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.” 

As more coronavirus cases are reported in the U.S., the community response to the spread is causing major concerns. Americans staying in and not spending (or, worst-case scenario, people losing their jobs) would be detrimental to the economy. 

The effect of a slowdown on small to midsize businesses is also of concern. These types of businesses are most often sustaining themselves on a week-by-week basis. A small disruption in traffic or consumer spending could be very bad news for a business' financial future. And, usually, layoffs are one of the first responses when there's a slowdown in business.

Last week, stock prices had their worst week since the 2008 financial crisis. A lot of investors sold off because of market uncertainties. The Dow Jones Industrial Average fell by 12.5%. Though it was able to recover from those losses on Monday, this news about an earlier-than-expected cut to interest rates shows that the Federal Reserve expects things to get a lot worse.

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Fed Chairman Jerome Powell said:

We saw a risk to the outlook for the economy and chose to act. Over the course of the last couple of weeks, we’ve seen a broader spread of the virus. We’ve seen it begin to spread a bit in the United States. But for us, what really matters of course is not the epidemiology but the risk to the economy.

He also mentioned:

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. But we do believe that our action will provide a meaningful boost to the economy. 

Based on its prediction that the U.S. economy will just barely hit a recession, Goldman Sachs lowered its growth forecast to 0.9% in the first quarter and zero in the second quarter. There is still no way to fully understand the impact that coronavirus will have on the economy. It will depend on the virus' duration and how exactly businesses and consumers respond.

There’s a lot at play right now. The headlines of COVID-19's spread into different states, potentially shutting down schools and businesses, are scaring people. The uncertainty of it all has the public, investors, and the Federal Reserve preparing for the worse.

Until next time, 

Jennifer Clark
Pro Trader Today
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