An emergency rate cut by the Federal Reserve was announced this morning as markets continue to be ravaged by coronavirus (COVID-19) fears. The benchmark interest rate was cut by 50 basis points (half of a percentage point), which many news organizations are calling a surprise, but in the nerd circles we run in, it was fairly expected.
Despite friction between President Donald Trump and Federal Reserve Chairman Jerome Powell, it is clear that they agree on the threat that coronavirus poses to the economy. The initial response was a stock market rally, then a brief negative turn, and now, heading back up again, making up for recent market losses.
President Trump continues to call for more cuts, tweeting his response to today’s move:
The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!
— Donald J. Trump (@realDonaldTrump) March 3, 2020
This rate cut is the first emergency cut since December 2008, as the housing crisis was in full swing. “The fundamentals of the U.S. economy remain strong,” Powell said in today’s press conference, crediting a strong labor market for driving economic growth which is being threatened by the coronavirus. He calls the ongoing situation “fluid.”
In a statement, the Fed said, “The coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.”
It is clear that Powell decided to stem the bleeding, so to speak, in hopes that the economic impact of COVID-19 fears doesn’t become worse. It is also likely that at the Federal Reserve’s scheduled March meeting in two weeks, another rate cut is likely.
The benchmark borrowing rate was cut three times in 2019 (a total of 75 basis points), and after the March meeting, will likely land around 1%-1.25%.
Just Friday, Powell had said in a statement that COVID-19 represents “evolving risks” and that the Fed would “act as appropriate,” which they now have. Critics point to supply-side damage with continued rate cuts, but there appears to be one sector that will benefit from these moves: Housing.
Dr. Lawrence Yun, Chief Economist at the National Association of Realtors noted, “The coronavirus has quickly upended global economic expansion and introduced the significant uncertainty of a possible recession. Today’s interest rate cut is therefore an appropriate response to changing events.”
Additionally, he declared, “The real estate sector will hold up very well because of the rate cut. Hesitant homebuyers will be enticed to take advantage of low interest rates. Commercial property prices will rise due to higher returns than can be had from the bond market after adjusting for risks.”
Despite market volatility, it looks like homeowners and real estate professionals will benefit from the rate cut.