The US Federal Reserve (Fed, central bank) took everyone by surprise on Tuesday, March 3, by cutting interest rates hot by half a point.
It is the first time since the great financial crisis of 2008 that it has intervened without warning and with a movement of such magnitude. The Fed, chaired by Jerome Powell, intends to do its part of the job as the global economy is threatened by the coronavirus epidemic. Its key rates will now move in a range between 1% and 1.25%, far from the 2.25% – 2.5% reached in December 2018.
And yet, it did not satisfy anyone. Neither the markets, which started to fall again after having rebounded strongly the previous day: the Dow Jones index ended the day on Tuesday down almost 3% (- 2.94%) while interest rates at ten years collapsed on their side in session up to 0.919%. Nor Donald Trump, who, as often, found it was too little. "No more drop!" ", demanded the President of the United States on Twitter. And neither are the United States' global partners, who were left in the lurch by the Fed's only partner, a few hours after a meeting of the G7 finance ministers, which gave hope for global coordination.
In their press release, the world's big money tellers were ready to "Use all appropriate instruments" to mitigate the economic impact of the Covid-19 epidemic, and in particular to take action "Budgetary".
Should the Fed Really Intervene?
The case raises many questions. On the merits, the Fed had to intervene. This is in particular the thesis of Patrick Artus, chief economist of Natixis. Ten-year interest rates had fallen to an all-time low of 1.031%, well above the short-term rent for money. "The yield curve was far too reversed", he believes. This situation was an incentive not to lend to companies that risk finding themselves in a financial shortage.
The monetary weapon is not very useful when the factories have no more workers and the consumers are caulked but it can help, combined with the budgetary weapon, households and businesses to make ends meet. The trouble is, the measure has made the situation worse, with ten-year rates falling below 1% on Tuesday.
The Fed was counting on a psychological effect, to show operators that it would not let the economy suffer without taking action, it has failed for the moment. The central bank was prompted to respond by the fall in the stock markets – the most severe weekly decline on Wall Street since the 2008 crisis – to prevent the crisis on the ground from being exacerbated by financial panic.
