Fed Cuts Rates to Counter Coronavirus Risks

In a surprise move, the Federal Reserve on Tuesday lowered the target range for the federal funds rate, its key benchmark interest rate, by 50 basis points,or half a percentage point, to a new range of 1% to 1.25%. The reasoning behind the move was concern about the “evolving risks” to the economy posed by the coronavirus.

The cut came after a meeting of Group of Seven (G7) finance ministers and central bankers issued a statement reaffirming their commitment to support the global economy. The 50-basis-point cut was the first move of more than 25 basis points since December 2008.

The federal funds rate is now in the 1% to 1.25% range

Source: Bloomberg. Federal Funds Target Rate Mid Point of Range (FDTRMID Index). Daily data as of 3/3/2020.

The federal funds rate is the interest rate banks charge each other to lend Federal Reserve funds overnight. It’s also a key tool the central bank uses to moderate or stimulate U.S. economic growth.

Treasury yields of all maturities dropped after the decision. Two-year Treasury yields dropped below 0.8%, indicating that markets may be expecting even more cuts down the road. Meanwhile, 10-year Treasury yields hit another new all-time low of 1.04%.

Source: Bloomberg, data as of 3/3/2020 and 2/3/2020. Past performance is no guarantee of future results.