Fed lowers rate due to COVID-19
In an effort to combat the negative effects of the coronavirus on the U.S. economy, the Fed made its first emergency rate cut since the housing crisis of 2008.
Certain industries have already been affected, and as the virus continues to spread globally, more areas of the economy may weaken as well. In China, where the outbreak started, the economy has experienced crippling growth over the past couple of weeks, with the government shutting down all kinds of businesses, from farms to factories.
Let's take a look at the threat coronavirus poses to the U.S. economy, as well as how our government is working to contain the damage.
How has coronavirus impacted the US economy?
Consumer spending makes up 70% of the U.S. economy. As media outlets continue to report alarming numbers of coronavirus cases and deaths, more Americans will stay home instead of going out to public places.
This means emptier malls, fewer fans at sporting events, smaller audiences in movie theaters, and so on. When people spend less money, businesses earn less revenue, which can force them to lay off employees and/or declare bankruptcy. If the coronavirus causes this snowball effect across various markets, the U.S. could find itself in another recession.
Currently, the industries that have seen real decline are travel and tourism. Airlines aren't selling as many tickets, hotels aren't booking as many rooms, and public events are being canceled worldwide. For businesses with heavy amounts of debt, this unexpected loss of profits can be fatal.
In the eyes of the Fed, lowering interest rates will encourage economic activity and offset the negative impacts of decreased consumer spending.
What is the Fed's new rate?
The Federal Reserve Board announced an emergency rate cut on Sunday, March 15, lowering interest rates to near zero.
“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent,” the Fed said in a statement.
In a press release, the committee stated that this change should support economic growth, but that they will continue to "closely monitor developments and their implications for the economic outlook."
Looking back on this decision a week later, how has this lower rate impacted the economy so far? Well, the stock market, which plays a huge role in the U.S economy, has been behaving erratically. The Dow, an index that tracks stock performances among large American companies, saw a 700-point boost immediately after the rate was lowered. But then, within the same day, the Dow fell by almost 800 points. This means that businesses and investors are pumping less money into the stock market, and if the numbers get low enough, it can have a detrimental effect.
For this reason, President Trump is encouraging the Fed to lower interest rates even further, with hopes that it will stimulate more economic growth. However, many economists believe that this could have the opposite effect.
What does the future look like?
The good news is that, at the moment, the U.S. economy is in good shape. For instance, the unemployment rate is the lowest it's been in 50 years. Slashing the federal funds rate is part of the government's strategy to keep coronavirus from having too large of an impact on the economy.
But the real effect it will have on American consumers and businesses is yet to be seen. So as the virus continues to spread and more data comes in, we could see additional fluctuations in interest rates.