Trump 'Very Happy' With Fed Decision To Cut Interest Rates
MICHEL MARTIN, HOST:
The Federal Reserve made a surprise announcement this evening that it is cutting interest rates to near zero. The move comes as the U.S. economy has been rocked by the fast-moving coronavirus outbreak. NPR's chief economics correspondent Scott Horsley joins us now to give us the latest.
Scott, this was reminiscent of the emergency moves that the Fed made during the 2008 financial crisis. What does this tell us?
SCOTT HORSLEY, BYLINE: Well, it tells us just how serious this situation is. The central bank doesn't ordinarily make announcements like this on a Sunday night. In fact, the interest rate setting committee of the Fed is set to meet this coming week, and we were anticipating a cut like this perhaps on Wednesday. The fact that they're acting now, before the stock market opens on Monday morning, and acting in concert with the European Central Bank in a coordinated way, tells us just how serious this situation is.
In its statement, the Fed said the effects the coronavirus are weighing on economic activity in the near term and pose risks to the economic outlook. In fact, a lot of economists think the virus has already pushed the U.S. into a recession. The Fed also promised to keep these near-zero interest rates in place as long as necessary to ensure that the economy has weathered the coronavirus shock.
MARTIN: So what effect is this likely to have on the economy?
HORSLEY: Well, there's some question, really, about whether this is, in fact, the medicine that the economy needs. The virus shock to the economy is taking a number of forms. It has affected supply chains. So factories here in the U.S., for example, can't necessarily get the parts they expected to get from China. Lower interest rates won't help with that.
The lower interest rates also might not do a whole lot to affect the current demand shock that we're experiencing. If people are more or less hunkered down at home, if baseball games are canceled, if shops are closed, lower interest rates won't necessarily do a lot to address that.
What this will do, though, is communicate to the stock market that the Fed is on the case. The market had more or less anticipated a cut like this. And there was some expectation that if the Fed didn't deliver, the stocks, which have already been taking a big beating and are in bear market territory, would fall further this coming week. So this is a way for the Fed to offer some solace, at least to investors, and also remind people that the central bank's on the job.
MARTIN: So, in addition to cutting its headline interest rate, did the Fed announced other actions aimed at preventing, you know, further financial shocks? Tell us about that.
HORSLEY: They did. They announced that they're going to be buying more treasuries and also more mortgage-backed securities. There are some interesting signs in the financial markets, especially the credit markets this past week - bonds moving not in the direction you expect them to, signaling perhaps a real loss of confidence in the financial markets - not just the stock market, but the credit markets.
And the risk there is that the pain in the real economy - that is, the people who are having their hours cut and the stores that aren't making the sales they would - might trigger a seizing up of the financial plumbing that could make this a worse and a longer-lasting problem than it would otherwise be. So the Fed is basically adding some financial WD-40 to keep the gears turning so...
HORSLEY: ...The very real economic pain that we're experiencing doesn't bleed over into the financial sector.
MARTIN: Just as briefly as you can, Scott - we only have 20 seconds - does the central bank have any other options if these moves don't have the desired effect?
HORSLEY: Well, they do. They have other tools that they can use. And they have said that they are committed to using those other tools. But the monetary medicine here is not the only medicine that the economy needs. And it's really going to be up to Congress and fiscal policymakers to also do their part to cushion the economic harm.
MARTIN: All right. That is NPR's Scott Horsley.
Scott, thank you.
HORSLEY: You're welcome.
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