Federal Reserve Drops Funds Rate in Surprise Cut Amid Coronavirus Fears

For the first time since 2008, the Federal Reserve cut rates outside of a scheduled meeting. The federal funds rate dropped 50 basis points in response to the virus’ demand- and supply-side impacts. Worries include the possibility that economic activity will drop as consumers spend less and travel plans are canceled, and that the virus will strain international trade. Even the home building industry is feeling the effects of the virus as trade shows such as Salone del Mobile in Milan are canceled, mortgage rates drop, and concerns arise regarding the availability of products and building materials: Face filter masks used by medical personnel and construction workers are now the unofficial symbol of the virus as they sell out on Amazon and in locations near outbreaks. Despite the anxiety surrounding the coronavirus, the Federal Reserve assures the public that the economy is still strong, but it warns that new developments regarding the coronavirus’s spread could further affect the market.

Reacting to the growing demand- and supply-side impacts of the coronavirus, the Federal Reserve FOMC today reduced the target range for the federal funds rate by 50 basis points, lowering the target to 1 1/4  and 1 percent. This is the first time since 2008 the FOMC enacted a federal funds rate cut outside of the typical meeting schedule. It was adopted unanimously and just two weeks before their scheduled March meeting. The target rate is now the lowest since late 2017, completely unwinding the rate hikes of 2018.

On the supply-side, disruptions to international trade are the main concerns. For residential construction, these supply-chain issues concern products like lighting, resilient flooring, plumbing fixtures and household appliances, as well as materials like particulate filter face masks used for construction purposes.

On the demand-side, declines in consumer sentiment and expected decreases in economic activity like travel, tourism, conferences and business meeting would depress economic activity mid-year. However, past history suggests that declines in economic activity to black swan events, like natural disasters, are typically followed by a period of rebounding economic growth.

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