MNI REVIEW:Fed Surprises With 50bp Cut, To Use Tools As Needed

--Powell Moves Hours After G7 Call Came Without Coordinated Action

By Evan Ryser

     WASHINGTON (MNI) - The Federal Reserve made a surprise 50bps rate cut hours

after an extraordinary G7 call ended without coordinated action, with Chair

Jerome Powell saying coronavirus threatens to sap the U.S. economy and he's

prepared to use more tools as needed. 

     The Fed slashed its benchmark rate 50 bps Tuesday morning to a range of 1%

to 1.25%, the first intermeeting cut and the largest since the 2008 financial

crisis. The unanimous vote was made to support an otherwise strong economy with

Powell saying "the risks to the U.S. outlook have changed materially" and the

Fed "can and will do our part ... to keep the U.S. economy strong as we meet

this challenge." 

     "We do like our current policy stance," as it stands now, Powell said,

adding the Fed will be "prepared to use our tools and act appropriately,

depending on the flow of events."

     "If we get to a place where we think it's appropriate time to change the

stance of monetary policy we won't hesitate to do that," Powell said.

     The decision opens questions of whether the Fed will cut again at its next

scheduled meeting or if other G7 nations and China step up with fresh stimulus.

Powell didn't answer on those topics, sticking to his main view the Fed needed

to act to rescue the world's largest economy. The Fed's move follows days of

plunging stock prices and bond yields as investors speculated the virus would

derail the global economy and a range of fiscal and monetary stimulus was

likely.

     Coronavirus impacts have not shown up in some economic data, Powell said,

but appeared in "sentiment forecast indicators" and are expected to continue and

grow. "That is one of the reasons we have come to the view it would be

appropriate for us today to move to support the economy."

     Rate cuts will "not reduce the rate of infection, it won't fix a broken

supply chain," he said. Monetary easing will provide a "meaningful boost" and

avoid a tightening of financial conditions.

     "The U.S. economy is strong, and we will get to the other side of this. I

fully expect that it will return to solid growth and a solid labor market,"

Powell said.

     Asked about the potential use of tools at the Fed's disposal, Powell said

"financial markets are functioning in an orderly manner," but supervisors could

"be working with banks to assure that they work with their borrowers."

     Powell said a globally coordinated, multi-faceted response will be required

to counteract impacts from the coronavirus, and he has "been in regular contact

with central bank leaders around the world and expects central banks to do "what

makes sense in their particular institutional context."

     The G7 statement released early Tuesday morning reflects "coordination at a

high level in a form of a commitment to use all available tools, including

healthcare policy, fiscal policy and monetary policy as appropriate," he said. 

     Powell said fiscal policy is not in the Fed's bailiwick, leaving it to

Congress. "We have a full plate with monetary policy, not our role to give

advice to fiscal policymakers."

     Treasury Secretary Steve Mnuchin said the Fed did the "right thing" by

cutting, and he is also considering all options to combat the virus. President

Donald Trump has long called for the Fed to match stimulus being offered by the

ECB and others, and Powell says politics never plays a role in his decisions.

     "Central banks are doing what makes sense in their particular institutional

context," Powell said when asked about coordinated action. 

     The OECD on Monday warned the global economy may contract in the first

quarter and pared its 2020 growth forecast on coronavirus risk, adding the U.S.

and Canada have the least reason to cut because of their lesser ties to China. 

     Economists polled by MNI predict the Bank of Canada will cut rates by a

quarter point at a scheduled meeting Wednesday to 1.5%. The Reserve Bank of

Australia on Tuesday cut its key rate by 25 bps to 0.5%, promising to ease

further to support growth if needed.

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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