Panic Cuttin

US Fed cuts rates

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What's going on?

With coronavirus putting the US economy on edge, the Federal Reserve (the Fed) announced an emergency cut to the countrys interest rates on Tuesday (tweet this).

What does this mean?

The Fed suggested late last week itd be willing to lower rates to help support the economy and economists at Goldman Sachs followed up by predicting the banks cut would be bigger than usual. But what Goldman didnt see coming was just how soon the Feds announcement would arrive. Perhaps the Fed didnt want to waste time announcing a rate cut that seemed pretty inevitable. The central bank is, after all, responsible for maximizing employment and stabilizing prices, and both were under threat: an increasing number of people have been missing work, while food and medicine-stockpiling looks like it might trigger rising prices.

Investors are now more likely to expect coordinated rate cuts from the worlds other major economies (think the UK, Japan, and the eurozone). Not least because the G7 only a few hours before the cut itself was promising to do what it could to achieve strong, sustainable economic growth

Why should I care?

For markets: Temporary relief rally.
The Feds announcement initially sent the prices of stocks up around the world: lower US rates make the countrys stocks more appealing, since investors wont earn as much on relatively safe investments like new government bonds (whose interest rates are partly based on the Feds rate). Investors also bought up existing bonds that offered higher returns, which in turn pushed their yields even lower.

The bigger picture: The economy that cried wolf?
Remember, we havent actually seen any economic growth figures since the outbreak took hold. That means this pre-emptive central bank action which wont leave it much wiggle room when theres eventually a recession could backfire. There have already been warning signs aplenty, and it could put added pressure on governments to boost their respective economies with fiscal stimulus that is, infrastructure spending, tax cuts, and so on.

Originally posted as part of the Finimize daily email.

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