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Economy & Business

Federal Reserve Cuts Key Interest Rate To Counter Coronavirus Risk

MARY LOUISE KELLY, HOST:

The Federal Reserve is trying to inoculate the U.S. economy from the effects of the coronavirus. The Fed cut its benchmark interest rate today by half a percentage point. That move came after a conference call with central bankers from around the world, all of whom are grappling with the epidemic. But the rate cut failed to calm financial markets. The Dow dropped nearly 800 points today.

NPR's Scott Horsley is here.

Hey, Scott.

SCOTT HORSLEY, BYLINE: Good to be with you, Mary Louise.

KELLY: Start with timing - was the timing of this rate cut a surprise today?

HORSLEY: A little bit, yes. This is the first time since the financial crisis that the Fed has cut interest rates outside one of its regularly scheduled meetings. And the cut was twice as large as what the Fed ordinarily does. That gives you some idea of just how seriously the central bank is taking the threat posed by the coronavirus.

Speaking to reporters this morning, Fed Chairman Jerome Powell said that even though you're not seeing a lot of evidence yet in the government's statistics of economic fallout, you are starting to hear anecdotal stories from people whose businesses are feeling the ill effects.

(SOUNDBITE OF PRESS CONFERENCE)

JEROME POWELL: You are hearing concerns from people, for example, in the travel business or the hotel business and things like that. We expect that will continue. It will probably grow. And that's one of the reasons why we've come to the view that it would be appropriate for us today to move to support the economy. And that's what we've done.

KELLY: That's what they've done. We - but an 800-point drop - how is this supposed to have worked? Cutting interest rates, how is that supposed to help the economy in this specific situation?

HORSLEY: Good question. You know, and the chairman acknowledged that it's really up to health care providers who bear the real responsibility for addressing this outbreak. And the kind of medicine the Fed can offer may not be exactly what the economic doctor ordered. You know, if you're a factory and you can't get the parts you need from China because your supplier's factory is closed, a rate cut is kind of beside the point. Nevertheless, Chairman Powell thinks this will have a positive effect.

(SOUNDBITE OF PRESS CONFERENCE)

POWELL: 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.

HORSLEY: Powell says today's rate cut should help to ensure credit keeps flowing, for example, and he thinks it will shore up confidence.

KELLY: Well - so then, how should we read the market's reaction today, which was not great?

HORSLEY: No, this was not a Super Tuesday for the stock market.

KELLY: No.

HORSLEY: Investors were initially encouraged by the Fed's move. Right after this announcement was made at 10 Eastern time, the Dow Jones Industrial Average surged more than 300 points. But the more they thought about it, the less investors liked the Fed's move. And as you say, by day's end, the Dow was down nearly 800 points. Some of the people who were dumping stocks turned instead to safe government bonds, and that pushed the yield on the 10-year Treasury to an all-time low - less than 1%.

I talked to the chief economist at Lending Tree, Tendayi Kapfidze. He thinks the Fed missed the mark here when it comes to reassuring people who are nervous about this epidemic.

TENDAYI KAPFIDZE: I don't see that a rate cut makes me want to get on a plane or go to a sports stadium or any other kind of economic activity that increases my risk of infections.

HORSLEY: Kapfidze thinks the Fed has gotten too quick to react to a falling stock market as opposed to an actual slowdown in the economy, and he warns that's just going to have investors expecting this every time there's a slump in the Dow.

KELLY: So what to try next? If lower interest rates isn't the answer, what else can the government do?

HORSLEY: Well, after their conference call this morning, Treasury Secretary Steven Mnuchin and other finance ministers promised to use all the appropriate tools - and that includes having federal governments pump money into their economies the way they did during the Great Recession. President Trump tweeted last night, lawmakers should consider a payroll tax holiday - something that was done during the recession. So far, though, there's been no follow-up on that idea from the White House and little talk on Capitol Hill.

We also heard today, Mary Louise, that the World Bank and International Monetary Fund are not going to hold their annual gatherings here in Washington next month as planned. Instead, those meetings will be virtual.

KELLY: Thank you, Scott.

HORSLEY: You're welcome.

KELLY: That is NPR's Scott Horsley. Transcript provided by NPR, Copyright NPR.