Dow Plunges Nearly 800 Points, Despite Fed Rescue Attempt

Mar 3, 2020
Originally published on March 3, 2020 3:54 pm

Updated at 4:22 p.m. ET

An emergency interest-rate cut by the Federal Reserve failed to mollify investors worried about the coronavirus epidemic, and stocks once again plummeted.

The Dow Jones Industrial Average ended down 786 points, a drop of 2.94% after an especially volatile trading day.

All the major indexes have lost more than 10% of their value since their all-time highs, moving back into what the market calls a correction.

The declines came despite a move by the Federal Reserve to cut a key interest rate by a half percentage point in an emergency attempt to shore up the economy at a time when the coronavirus threatens to slow growth.

The cut was the largest by the central bank since the 2008 financial crisis and it came as the Fed faced growing pressure to address the impact of the spreading epidemic on the global economy.

"The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity," the central bank said in a statement Tuesday morning.

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The Fed's move should lower the cost of borrowing, including for credit cards, auto loans and mortgages. The Fed cut its target for the federal funds rate to a range of 1% to 1.25%. But by cutting rates to such a low level, the Fed has left itself less room to move aggressively if the economic fallout from the virus should worsen.

"We do recognize that a rate cut will not reduce the rate of infection," Fed Chairman Jerome Powell said. "It won't fix a broken supply chain. We get that. We don't think we have all the answers. But we do believe that our action will provide a meaningful boost to the economy."

But some economists said the move would do little to address the real problem facing the economy right now: Fear of the virus is causing many people to stay home, shutting down factory production, hurting retail sales and reducing travel.

Bernard Baumohl, chief global economist at the Economic Outlook Group, compared the Fed's move to "putting a Band-Aid on an arm to cure a headache."

"One is hard-pressed to see how precisely this easing in monetary policy will effectively counter fears of getting ill from this pathogen," he wrote.

An extended outbreak will stifle demand throughout the economy as people avoid activities that could expose them to the virus, according to Tendayi Kapfidze, chief economist at LendingTree.

"What's far less clear is whether a rate cut actually does anything to alleviate that demand shock," he said.

Powell acknowledged that a rate cut is only one part of the response required by the outbreak and that primary responsibility will rest with doctors, nurses and public health officials.

Last week, stock prices had their worst week since the 2008 financial crisis, with the Dow Jones Industrial Average falling by 12.5%, although it recouped part of its losses on Monday.

The Fed left open the possibility of further rate cuts down the line, saying it was monitoring developments and would act as needed to shore up growth.

Powell said that while fallout from the epidemic has yet to show up in most economic statistics, anecdotal reports hint at what's to come.

The extent of the shock to the economy will depend on the duration of the virus and the extent to which businesses and consumers curtail spending in response to the outbreak.

Goldman Sachs is predicting the U.S. economy will barely skirt a recession, but it has lowered its growth forecast to 0.9% in the first quarter and zero in the second quarter.

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RACHEL MARTIN, HOST:

The Federal Reserve is taking action against the coronavirus. The central bank announced a surprise move this morning to cut interest rates by half a percentage point in order to cushion the epidemic's economic blow. This comes after a conference call with finance ministers and central bankers from other G7 countries around the world. We've got NPR's Scott Horsley with us in studio to talk about the repercussions of it. Hi, Scott.

SCOTT HORSLEY, BYLINE: Good to be with you, Rachel.

MARTIN: We called this a surprise move more because of the timing than anything else, right?

HORSLEY: That's right. Investors had been more or less banking on the Fed to cut interest rates, and they were even expecting the Fed to maybe act before its next scheduled meeting in a couple of weeks. But the expectation had been for action maybe tomorrow, so this is something of a jump-start. The Fed does not have a whole lot of room to cut interest rates. Rates were already pretty low. So the central bankers are trying to get as much bang for the buck as they can. And so this earlier-than-expected announcement seems designed to serve as kind of a economic defibrillator for all those fluttering hearts on Wall Street.

MARTIN: (Laughter) Fluttering? More than fluttering sometimes.

HORSLEY: (Laughter).

MARTIN: I mean, the market's been so volatile over the last few weeks. How are investors reacting to the Fed's move today?

HORSLEY: Investors don't seem to quite know what to make of this. The market got an immediate bounce when the announcement was made about 45 minutes ago. The Dow Jones industrial average jumped more than 300 points. Then it sagged back into negative territory, as investors thought more about this. As of this moment, the market is up about a third to a half a percent. But, you know, after a very volatile week or 10 days, it looks like the rocky ride is set to continue a while longer.

MARTIN: I mean, this is part of a coordinated effort by central bankers around the world. Is this all about mitigating the effects of the coronavirus, globally?

HORSLEY: That's right. Jerome Powell was on the telephone this morning with his central bank counterparts from the other G7 countries. Treasury Secretary Steven Mnuchin was also on that call, as were the other finance ministers from the big industrial countries. Obviously, coronavirus is a worldwide problem, so economic leaders are trying to craft a worldwide economic response.

After that conference call, the leaders issued a joint statement in which they promised to use all appropriate policy tools to address the coronavirus spread. Obviously, it's up to doctors and public health officials to deal with the medical challenge, but when it comes to the economics, these leaders say they are prepared to use both interest rate cuts, like we've seen this morning, as well as, you know, fiscal measures - that is, government stimulus, like we saw during the Great Recession.

MARTIN: So you - can you walk us through - I mean, what will this move accomplish and what won't it accomplish in terms of helping the economy through the coronavirus?

HORSLEY: Here's what it won't do - it will not expedite the development of a vaccine, which public health officials tell us is about a year away. It will not revive all the travel that's been cancelled as a result of the epidemic...

MARTIN: Right.

HORSLEY: ...Or the business meetings that have been called off and the deal that won't get done because of that. It also won't address the supply chain challenges. We got a report yesterday on the U.S. manufacturing sector, which is running barely above stall speed, and the report included a lot of complaints from factory owners who say they're having trouble getting both parts as well as information from their suppliers in Asia, where the epidemic and the quarantines have shuttered a lot of factories. Nothing the Fed did today is going to change that.

What it may do, though, is prop up the stock market and avoid the kind of reverse wealth effect we have been in danger of seeing, you know, if consumers just stopped spending altogether. Consumer spending is a huge driver of the economy, and while the Fed can't necessarily reassure consumers who are nervous about their own health, it can reassure those who are nervous about the health of their retirement accounts. So that's what we're seeing with this action today.

MARTIN: All right. NPR economics correspondent Scott Horsley. Thanks, Scott. We appreciate it.

HORSLEY: You're welcome.

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