In a rare between official meetings move, the US Federal Reserve has cut its key interest rate by a larger than normal half a percent as the impact of the COVID-19 virus continues to roil markets and starts to damage the global economy.
The Federal Funds Rate was cut to a range of 1% to 1.5% in a decision well ahead of its next meeting in a fortnight’s time.
The timing of the announcement – between Fed meetings added to both the drama and the negative impact on market thinking about the seriousness of the COVID-19 situation and its potential impact on the US and global economies.
And that lead to another wild day in US markets (European markets had steadied and shown modest gains before the Fed news).
The news will see the ASX start sharply lower with overnight futures trading down 88 points at the close this morning.
The Aussie dollar regained the 66 US cent level briefly but then sold down to around 65.95 as the selling intensified on Wall Street.
The most dramatic reaction came in the bond market where the yield on the 10-year US Treasury slumped to under 1% for the first time (after a series of new record lows in the past week).
It touched a low of 0.9119% and was trading around 1.017% in Asia. The yield on the 10-year Australian bond fell to a new all-time low of 0.71%.
Stocks initially jumped after the announcement, but that proved to be a short-lived gain and they quickly turned lower and the Dow plunged to be down 1,000 points at one stage.
The Dow ended down 785.91 points, or 2.94%, the S&P 500 shed 86.86 points or 2.81% and the Nasdaq Composite lost 268.07 points or 2.99%.
Stocks had bounced back sharply on Monday (the Dow surged more than 1,200 points or f%), on growing hopes for central bank intervention.
That help has now arrived and investors no not live or the underlying messages.
Gold recovered more of its safe-haven shine and Comex April futures jumped $US49.60, or 3.1%, to settle at $US1,644.40 an ounce—the largest one-day percentage rise since June last year That was after Monday’s 1.8% rise and the 5% slide last Friday.
Oil trimmed early gains in afternoon dealings before settlement. April West Texas Intermediate oil rose 43 cents, or 0.9%, to settle at $47.18 a barrel in New York after trading as high as $48.66.
Traders are still eyeing the OPEC meetings in Vienna from tomorrow which could see a further 600,000 to a million barrels cut from OPEC’s daily production.
Comex May silver jumped 44.9 cents, or 2.7%, at $US17.188 an ounce, following a 1.7% on Monday and a big loss last week. But Comex May copper fell 0.9% to $US2.573 a pound.
The Fed’s emergency decision saw it cut rates in response to the coronavirus dangers after the Reserve Bank of Australia and Malaysia’s central bank trimmed their key rates to help cushion their economies against the impact of the virus.
The Federal Reserve voted to cut its main policy rate by 50 basis points on Tuesday morning, US time in an emergency meeting, responding to “evolving risks” from the spread of the coronavirus.
“The fundamentals of the US economy remain strong,” the Fed’s Open Market Committee said in a unanimous statement. “However, the coronavirus poses evolving risks to economic activity.”
The US central bank cut rates three times in 2019 and has since held the fire amid signs of improving growth after the striking of a “Phase One” trade deal between the US and China.
The main US stock indexes had closed more than four percent higher on Monday after their worst week since 2008, as central banks in Japan and the EU joined the Federal Reserve in signalling further monetary easing.
In a media conference, Fed Chairman Jerome Powell said “we saw a risk to the outlook for the economy and chose to act. I don’t think anybody knows how long it will be. I do know that the U.S. economy is strong.” Powell also hinted at the possibility of more formal global coordination in the future.
Earlier, Group of Seven finance ministers and central bank governors held a conference call Tuesday and issued a statement indicating their “commitment to use all appropriate policy tools to achieve strong sustainable growth,” but signaled no concrete steps in the communique.
