In an unprecedented move, the US Federal Reserve has cut interest rates by 0.5%, in order to stimulate the US economy in as concerns regarding the coronavirus spread. The Fed cut rates by 50 basis points, making the new benchmark rate now between 1 and 1.25%.
What makes this move such a surprise is the fact that it was unscheduled, making it an emergency rate cut. This has not been done since 2008, during the global financial crisis, and is also the largest one time cut since that time.
In a statement released, the Reserve revealed that although they thought the US economy was still fundamentally strong, the coronavirus posed a unique evolving threat to economic activity. However, they still expect the economy to make a full recovery once the coronavirus passes.
Gold typically enjoys lower interest rates as the metal does not generate any interest itself. And we can see this in action as after this announcement, the US dollar weakened, and gold had a sharp reaction to the upside. Trading at $1,605 per ounce before the announcement, the yellow metal smashed past the $1,611 and $1,632 resistance levels, reaching a high of $1,648 before dropping back down.
Although a rate cut this month had been expected by the market, as the Federal Reserve had a scheduled meeting in just two weeks anyway, they had still kept their lips tight before this announcement, and the fact that they chose to make this announcement before the meeting shows how serious they see the situation to be.
The drop of US stocks last week was also clearly a factor, as the Dow Jones, NASDAQ, and S&P 500 all experienced record drops. The Dow also had an initial surge after the announcement, but then quickly also reversed its gains, perhaps fuelled by market sentiment that the rate cut was not enough. However, others maintain that there is still only so much that the Fed can do to combat the risks presented by the coronavirus.
Following the Federal Reserve, other countries are also expected to follow suit, with the Bank of England already announcing an emergency rate cut as well. The BOE’s decision comes as no surprise as they had already said earlier in the week that they were prepared to make the necessary moves in order to support the British economy.
Link to Federal Reserve statement here: https://www.federalreserve.gov/newsevents/pressreleases/monetary20200303a.htm