The spreading coronavirus threat has forced the US Federal Reserve to act fast. It announced an emergency interest rate cut on Tuesday, slashing the benchmark interest rate by half a percentage point. This is the biggest cut since the global financial crisis in 2008. The move comes just a few days after the Fed assured the markets of all possible action to support the American economy.“The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy,” Federal Reserve chair Jerome H. Powell had said in a statement a few days ago. The move to drastically cut the rate is likely to send out a signal or two to central banks across the globe. A coordinated exercise to contain the economic fall-out from the coronavirus appears very imminent.Also read: Why Shutting Down Chinese ‘Wet Markets’ Could Be a Terrible MistakeThe Fed, it may be mentioned, hasn’t resorted to such an emergency rate cut since the 2008 financial crisis. That it voted unanimously in favour of the rate reduction to help stabilise the economy and financial markets is an indication of the deep realisation of the emerging crisis in the wake of the coronavirus. This is indeed a highly unusual move, according to many observers. And this must also be viewed in the context of President Donald Trump calling for a big rate cut.“The coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the [Fed] decided today to lower the target range for the federal funds rate by 1/2 percentage point,” the Fed said in a statement. Just to put things into perspective: Emergency Fed cuts were rarely a good sign. (Chart via Heieck Siebrecht Cap Advisors) pic.twitter.com/WoJteNjRhe— Holger Zschaepitz (@Schuldensuehner) March 3, 2020At a news conference later, Powell said that Fed took the rate cut action after officials saw the coronavirus was having a material impact on the economic outlook. “The magnitude and persistence of the overall effect on the US economy remain highly uncertain and the situation remains a fluid one,” he told reporters. Trump in a tweet, however, said that the cut wasn’t enough.The Fed’s move move came closely after G7 officials offered measures to help impacted countries and a day after the International Monetary Fund made a similar commitment.Nearer home, the Reserve Bank of India (RBI), earlier on Tuesday, came out with a statement to cool the financial markets. The banking regulator said that it was monitoring global and domestic developments closely and continuously. It asserted that it “stands ready to take appropriate actions to ensure orderly functioning of financial markets, maintain market confidence and preserve financial stability”. The apex bank admitted that financial markets across the globe had been experiencing considerable volatility, with the spread of the coronavirus, triggering risk-off sentiments and flights to safe haven. Nevertheless, the RBI asserted that the spillovers to financial markets in India had largely been contained. “Growing hopes of coordinated policy action to mitigate a broader fall-out to economic activity has boosted market sentiment today (Tuesday),” the banking regulator said. Also read: Forget Trump’s GSP Angst. How Can Modi Make India’s Exports More Competitive?The Indian stock markets, predictably, got a booster of sorts on Tuesday in the wake of the RBI’s ‘intervention’ statement. The BSE Sensex gained 479.68 points to 38,623, while the NSE benchmark Nifty gained 170 points to close at 11,303 on Tuesday. The Indian markets too seemed to have pinned their hopes on relief measures by major economies and a possible conference call by the G-7 finance ministers. All these have revived market sentiment, pushing domestic equity indices higher.With the economy sliding faster, there are fears that the escalating coronavirus concern will further accentuate the downhill course. With the Fed stepping in to stem the situation with a bold rate cut, pressures are bound to increase on India’s central banker to also follow the US’s course. The Indian government has, in the meanwhile, issued a travel advisory, suspending all regular visas/e-visas granted on or before March 3 to nationals of Italy, Iran, South Korea and Japan who have not yet entered India, a day after two fresh cases of coronavirus was reported in the country. There is an across-the-board demand for the RBI to slash rates sooner rather than later. Yet, that won’t be suffice. As the RBI governor himself has pointed out on more than one occasion, the fiscal authorities too have to quickly step in to roll out measures to contain the negative impact. At the moment, sentiment is extremely negative. And it requires both the central banker and the central government to work in unison. Nobody can afford to dither on what needs to be done now. K.T. Jagannathan is a senior business journalist.
