THE VIRUS IS HERE – FED GIVES BOOSTER INJECTION

We do not know where this coronavirus is headed……and that’s the scary part; it is completely uncharted territory.

And that is probably what the Fed is also afraid about; much ahead of the 18^th March scheduled meet, proving many analysts right, in a surprise move, the US Fed tonight reduced the interest rate by 50 bps – an emergency rate cut.

More than making one feel assured, it is scary – it is almost like an official affirmation that is pandemic. This rate cut is like a stimulus to help get over or protect the economic from the spreading coronavirus.

The Fed very clearly said, “the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point.”

This is a huge change from the Fed’s earlier stance where it had projected that there would be no change in the rates during 2020 and preferred to sit on the sidelines during the US election year.

Many say that the Fed over-reacted, going by for this more than normal rate cut and that too between meets. They feel the Fed is panicking as much as the markets did last week.

But maybe not; what the Fed did is preempt – it is trying to be cautious, prevention being better than cure. The US economy is on a strong foothold and it is good that the Fed acted instead of later reacting. This way, even if the virus spreads further, the impact on the economy will be staggered.

The Fed has sent the message loud and clear that this is a new challenge and risk from the virus and the disruption in the economies across the world and markets will likely show the effects for some time.

One does not know if this rate cut will actually prop up the economy if the virus spreads further and impacts economies deeply. Yes, it is a psychological booster. But a lower rate will not make raw material from China magically come to the factories around the world and more importantly, in an atmosphere of fear of infection, where people might start shunning public places and malls, the rate cut might not do much for manufacturing growth. It could help ease the debt repayments and calm down volatility.

This emergency rate cut might become a norm as other central banks too might take the cue and cut rates. Some Govts might resort to stimulus. In India, we do not have a RBI meet this month; now hopes will soar that like the Fed, the RBI will also announce a bigger than normal emergency rate cut soon.

The economic steps being taken are precautionary but we all need to be cautious to keep this virus at bay. The virus has indeed entered our shores and we do not know if our Govt health machinery is capable enough to handle a pandemic of this proportion. That’s the bigger scare….