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Breaking Down the Fed’s Emergency Cut

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COVID-19 Death Toll Rising

It will take some time before we find out just how far the impact of the Wuhan virus has stretched, and how much it has affected the world in terms of numbers.

However, as things stand currently, the international community is on high alert. In Dubai for example, schools will be closed for a whole month. But is this reaction justified, or is it a step too far?

Without getting into that detail, the point raised is that the coronavirus is real. And it is making its presence felt throughout the entire world.

The death toll in Italy is increasing and the Washington Post keeps reporting larger numbers of confirmed deaths in the US.

To say that people around the world are fearing that the worst is yet to come would be an understatement.

Investors have kept an eye on the performance of global equities following the outbreak. However, they remain concerned as the risks of a recession continue to increase.

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Global Central Banks to the Rescue

Was it the right time for central banks to make a coordinated effort and ease the fear?

Well, it can be argued that the banks’ efforts can be justified when taking into consideration what they are trying to avoid: a global recession.

Central banks now stand ready to take action to curb losses and put faith back into the financial markets. But will they be able to quell coronavirus fears and bring the markets back to the norm?

Fed’s Surprise Cut Not Seen Since 2008 Crisis

Two weeks ahead of the FOMC, the Fed surprised the markets by slashing interest rates by 50 basis points.

The last time the Federal Reserve took such drastic action was back in 2008, amidst the financial crisis.

It’s worth mentioning that the US economy overall is doing well. And the fundamentals support a strong economy, something reiterated by the Fed Chairman Powell as well.

However, in the midst of the coronavirus pandemic and the bloodbath in the financial markets, it was necessary to act now before it was too late.

Fed Chairman Powell stated:

“We saw the risk to the outlook for the economy and chose to act… I don’t think anybody knows how long it will be.”

The latter part of the above statement clearly refers to the uncertainty surrounding how long the coronavirus will remain a lingering threat. However, the Chairman was upbeat that this dilemma will eventually see an end, stating:

“I know the US economy is strong and we’ll get to the other side of this and return to solid growth and a solid labor market as well.”

Why Slash Interest Rates Because of a Virus?

Slashing rates doesn’t miraculously fight off the effects of a virus. However, it does assist in building confidence within the business community.

The surprise cut sheds some light on the effects the virus has had and is likely to have on businesses.

The first industries to be impacted are clearly travel and leisure. But, not surprisingly, that’s just the tip of the iceberg.

It will definitely take time to truly understand the damages the virus has caused financially.

And, with that in mind, the time and size of the cut might prove supportive for global economies. That being said, further cuts might still prove to be a necessity.

Global central banks elsewhere are expected to act ASAP. The RBA did it, the BOC is expected to act today and others are likely to follow suit. And soon, before it is too late.

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