Federal Reserve may cut interest rates to keep up momentum in US stocks markets

Federal Reserve chairman Jerome Powell said the coronavirus “poses evolving risks” to the US economy and signalled the central bank is prepared to cut interest rates if necessary to sustain the country’s longest-ever expansion.

The rare statement issued on Friday by Mr Powell before the financial markets closed for the weekend came as stocks posted their seventh-straight daily loss, a slump which earlier prompted a string of Wall Street banks to predict the Fed would start reducing rates at its meeting this month, if not sooner.

Yields on US Treasury securities, one of the world’s safest assets, this week fell to record lows as investors were increasingly concerned that the deadly virus would damage US and global economic growth.

“The fundamentals of the US economy remain strong,” Mr Powell said on Friday. “However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.” The missive recalls previous instances when the Fed changed course or had to address a budding crisis. When credit markets began to seize up in August 2007, the central bank issued a statement saying it was “prepared to act as needed”. Just last June, Mr Powell said the Fed would “act as appropriate” to sustain the expansion.

The Fed cut rates at its meetings in July, September and October, but has since been on hold and indicated it planned to be so long as there was no “material change” to the outlook. The virus may now deliver such a shift in the economy amid mounting concern it has already hurt the Chinese economy and now threatens to damage supply chains, demand, tourism and trade elsewhere. The S&P 500 pared losses after the statement but remained lower for the day, closing down 0.8 per cent on Friday and 11.5 per cent lower over the week, the largest drop since 2008.

Michael Feroli, chief US economist at JP Morgan Chase in New York, said Mr Powell has put an interest-rate cut “squarely on the table” for when the Federal Open Market Committee meets on March 17 and 18 in Washington.

“This is a step in the right direction to help calm some of the concerns,” he said. “This is important in that they’re saying they are not going to be stubborn here.”

Fed officials spent the week pushing back somewhat on the need for emergency rate cuts, saying there was too much uncertainty about the virus’s economic impact despite its spread from China. There is also doubt over what lower rates would achieve given they may not prompt consumers or companies to spend if they’re uncertain about the future or scared for their health.

But stocks kept sliding and economists started slicing their forecasts for the US economy. Some started to warn of the weakest global expansion in a decade as the impact of the virus outbreak rippled from China to Europe and the Americas.

“I hope the Fed gets involved and I hope they get involved soon,” President Donald Trump, who has repeatedly pressured the Fed to cut rates, said on Friday.

The Fed is closely monitoring [coronavirus] developments and its implications for the economic outlook JEROME POWELL Federal Reserve chairman