Fed drops interest rates, but Dow still sinks 2.9%

Traders work on the floor at the New York Stock Exchange in New York, Tuesday, Feb. 21, 2012. | AP

SALT LAKE CITY — With the United States and countries around the globe facing a possible health crisis and maybe a recession, the nation’s central bank took a bold step and dropped its key interest rate in a move aimed at creating economic stability.

The Federal Reserve Tuesday issued an emergency rate cut by shaving half a percentage point due to concerns regarding the coronavirus health crisis that is gripping the United States. Officials said the decision was meant to bolster the U.S. and global economies and mitigate the risk of a recession in the near-term.

But fear and uncertainty continued to control Wall Street as stocks fell sharply Tuesday after the emergency interest-rate cut failed to reassure markets wracked by worries that the fast-spreading coronavirus will cause a recession.

The Dow Jones Industrial average sank 785 points, or 2.9%. It had surged 5% a day earlier on hopes for a broader set of stimulus measures. While the cut gave some investors exactly what they had been asking for, Federal Reserve Chairman Jerome Powell acknowledged that the ultimate solution to the virus challenge will have to come from health experts and others, not central banks.

“When we talk (about the future), we worry about these (potential) external shocks. And coronavirus is a really good example of an external shock that you just you can’t predict,” said Juliette Tennert, director of economic and public policy research at the University of Utah’s Kem Gardner Policy Institute. “It inserts all sorts of uncertainty into the forecast.”

She noted that after 10 years of economic expansion, the national economy is in the latter part of the traditional cycle before it has historically drifted into a low-grade recession. So it stands to reason that an unexpected force could possibly be the impetus for a potential downturn.

“To the extent that (coronavirus) really starts to take hold and (prompts) a slowdown, that can certainly change the path of the global economy and the U.S. economy,” she said. “That’s where you see policymakers trying to figure out how they can intervene and interest rates is one way that the Federal Reserve can intervene to help keep some economic activity happening.”

Another local analyst said the crisis may have already begun to impact the nation’s economy in the first few months of this year.

“You’re looking at possibly a pretty big hit to first quarter growth and maybe even in second quarter growth,” said Jeff Steagall, professor of economics of the John Goddard School of Business & Economics at Weber State University. “The Fed has just stepped in and (is) trying to say, ‘We think if we do this, that’ll give people some confidence, give businesses some confidence that they might be able to get a loan that they were on the margin of going after.’

Now that the interest rate is lower, it’s a little bit more attractive. (The Fed is) just trying to stimulate the economy a little bit.” he added.

He noted that the U.S. has been in an “extremely long period of economic prosperity,” but things have begun to change in a way that no one was expecting.

“Before the virus, everybody was fairly comfortable that things are going to be OK for another year. Nobody was really worried about too much,” Steagall explained. “But these external impacts can have a big effect on the economy. Part of it really is the uncertainty attached to the virus. Nobody quite knows how serious this is or what to do about it.”

In the short term, he said the impact the illness is having in China may have some ripple effects that impact the world’s ability to function properly economically.

Some traders are also questioning whether more aid is on the way to stabilize the market, while others called the Fed’s move premature to begin with. For more than a few, the Fed’s steepest rate cut since 2008 recalled the dark days of the financial crisis and only added to the dread. Through it all, markets are still faced with the same quandary that has sent stock prices tumbling 11% since they set a record just two weeks ago: No one knows how far the virus will ultimately spread before authorities can get it under control, and by how much companies’ profits will be shorn because of it.

Contributing: Associated Press

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