by Anna Stupnytska (Head of Global Macro and Investment Strategy) and Timothy Foster
In a much faster-than-expected move, the Federal Reserve has delivered its first emergency rate cut (50 basis points) since the 2008 financial crisis. Between three and four 25bps rate cuts had already been priced in by the market for this year, but the first cut was not expected to come until the scheduled meeting later this month.
Clearly, last week’s sharp market sell-off in light of coronavirus-related anxiety and the resulting tightening in financial conditions encouraged the Fed to take pre-emptive action to reassure the market - this is a strong signal from the policymakers and a smart move to go early on an already expected cut. Nonetheless, the Fed may have to ease policy further in the weeks to come and appears ready to do so.
As the spread of the coronavirus continues and the chances of containment become slimmer, the impact on the global economy is likely to be sizeable. But while easier monetary policy helps sentiment, central banks should be not acting in isolation; governments should step in with fiscal measures that are timely and well designed, supporting the economies that struggle not just because of the virus itself but also because of preventative measures that - in some cases - have ground economic activity to a halt.
Following the meeting of G7 finance ministers and the Reserve Bank of Australia and Fed moves today, it is now likely that other major central banks such as the Royal Bank of Canada and the Bank of England will follow suit in a coordinated fashion.
