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Fed cuts rates to fight coronavirus impact on economy

The Fed had made a move like this the last time when investment bank Lehman Brothers turned bankrupt and the banking system got the jitters


The US Federal Reserve (Fed) reduced interest rates today in an emergency bid aimed at shielding the world’s largest economy from the impact of the novel coronavirus 2019 pandemic that has made its way from China to Europe to the United States. The central American bank said in a statement that it was cutting rates by half a percentage point to a target range of 1.00% to 1.25%.

“The fundamentals of the US economy remain strong,” the Fed statement said, however.

The risk coronavirus poses to the economy worldwide, especially in countries that have reported scores of cases, evolves. For example, the price of crude oil dropped but then stabilised. “In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate,” the Fed, therefore, said a statement.

The policymakers made the decision unanimously.

The Fed cut reduces the American interest rate to just below 1.25%. After an initial surge in the stocks on the news, the Dow Jones industrial average slid, as everyone from doctors to Wall Street traders is trying to figure out how much more the coronavirus pandemic will affect the economy.

The decision of the Fed to cut interest rates before its next scheduled policy meeting on 17-18 March shows the urgency with which the Fed believes it must act to prevent the possibility of a global recession.

“The Fed has proved today that it is willing to do whatever it takes to keep the bull market alive,” said Naeem Aslam, chief market analyst at AvaTrade. “I think the flood gate is wide open and other central banks like of Bank of Canada is also likely to follow the same path.”

Following the bankruptcy of bank Lehman Brothers and the risk the global banking system faced, the Fed had made a move like this on the last occasion. The Fed is now attempting to downplay the risks, calling the US economy “strong” in its statement. However, analysts remain on edge.


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