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The Fed slashes interest rates by surprise

The US Federal Reserve caught everyone short on Tuesday, March 3, by cutting interest rates hot by half a point. This is the first time since the Great Financial Crisis of 2008 that the Fed has intervened by surprise and with a movement of such magnitude. The central bank, chaired by Jerome Powell, intends to do its part of the job as the global economy is threatened by the coronavirus epidemic. The 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 went back down after having rebounded strongly the day before: the Dow Jones index ended the day down almost 3% (2.94%) while ten-year interest rates s collapsed 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 the United States’ global partners, who were left in the lurch by the American horseman, a few hours after a meeting of the G7 finance ministers, which gave hope for global coordination. In their press release, the world’s major silver workers said they were ready to “Use all appropriate instruments” to mitigate the economic impact of the coronavirus epidemic, and in particular to take action “Budgetary”.

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Should the Fed Really Intervene?

The case raises many questions. On the merits, the Fed had to intervene. This is the thesis of Patrick Artus, chief economist of Natixis, in particular. Ten-year interest rates had dropped to an all-time low of 1.031%, well above the short-term money rent. “The yield curve was far too reversed”, says Artus. This situation was an incentive not to lend to companies that risk finding themselves in a financial shortage.

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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 March 3. The Fed was counting on a psychological effect, to show operators that it would not leave the economy without taking action, it has failed for the moment. The central bank was prompted to respond by falling markets, the most severe weekly decline since the 2008 crisis: the crisis on the ground had to be prevented from being exacerbated by financial panic.

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