Alert

Federal Reserve Cuts Funds Rate Due to Coronavirus Uncertainty

In a surprise move on March 3, 2020, the Federal Reserve (the Fed) announced it would cut the Fed funds rate by 50 basis points. This is the first rate cut outside of a scheduled meeting since October 2008—and the vote was unanimous.

The brief statement noted that while the US economy remains strong, the COVID-19 (coronavirus) pandemic poses evolving risks to economic activity. It added that the Fed is closely monitoring developments and will act as appropriate to support the economy.

At a press conference following, Chair of the Board of Governors of the Federal Reserve System Jerome Powell said risks to the US outlook have changed, but the economy is expected to return to solid growth. He also indicated that the Fed is in active contact with other central banks, and there may be more formal coordination moving forward.

About Coronavirus

Here’s what we know:

  • According to the CDC, COVID-19 typically causes mild to moderate upper respiratory illness often associated with the common cold.
  • While rates are slowing inside China, infections have been rising outside of China.
  • Mortality rates are skewed heavily towards older individuals with pre-existing conditions.
  • The virus is more difficult for people with compromised lung capacity, so mortality rates outside China might be lower given China’s combination of poor air quality and high smoking rates.

Impact

As health officials respond to the rapid spread and mount an all-out effort to fight the virus, the question of how resulting containment measures will impact the global economy remains uncertain.

Here’s what we know thus far:

  • Global supply chains have temporarily been impacted given reliance on Chinese production for key intermediate goods.
  • US impact should be manageable as companies have been moving their supply chains elsewhere since the beginning of the trade wars—albeit slowly.
  • There are reports of Chinese factories reopening and returning to business.
  • Markets are now pricing in earnings declines from the virus in 2020, which is normal and expected in times of uncertainty.

Precedent

Risk of pandemics is inherently unpredictable, but not without precedent.

Severe Acute Respiratory Syndrome (SARS), Ebola, and Zika are just a few of the more recent episodes that caused public health scares. While none of these examples became a meaningful threat to markets or the global economy, one can’t assume past experience will prevail. Circumstances of each outbreak are unique.

There’s simply no way to know for certain how severe the outbreak of COVID-19 will become, but modern medicine and precautionary measures are in place. In addition, many organizations report that new case growth in China is on the decline, vaccines are in the works, and seasonal changes may limit the spread.

Outlook

Over the next several weeks, we’ll carefully monitor both economic and health data for signs of potential longer-term damage.

As long-term investors, we must be careful not to be influenced by the natural ebb and flow in markets. Headlines of this nature can be unnerving, but it’s important to remember that investing involves potential long-term reward for assuming this type of risk over the short-term. Turbulence in the markets offers opportunities for rebalancing.

For these reasons, we advise clients to remain committed to their long-term investment strategy and avoid the impulse to react to pockets of market volatility.

We’re Here to Help

If you have any questions about the potential impacts of coronavirus on your investments, please contact your Moss Adams professional.