March 9, 2020 — Sudden Drop in Interest Rate to Mitigate Coronavirus Fears


On February 21 the recession odds for the US were at a 15-month low, according to JP Morgan; only a week later virus fears caused the market to slide down 10 percent.  Investor confidence was shattered by fears of a global slowdown as a result of spreading COVID.   On Tuesday, those fears resulted in a surprise announcement from the Fed; two weeks before the regular monthly meeting; that dropped interest rates by 0.5 percent.  This was the first inter-meeting cut since 2008.

In a press conference following the announcement, Fed Chair Powell said, to the surprise of many, that the US economy is “strong” and it would “get to the other side of the virus”.  Further, “And I fully expect that the US economy will return to solid growth and a solid labor market as well.”

To confirm Powell’s statement, data later last week showed February job numbers that would have created elation, save for the virus. 273,000 new jobs were created, beating an estimate of 175,000. The unemployment rate fell by 0.1% to 3.5%, a 50-year low, and average hourly wages rose 3 percent, year over year.  The economy was gathering momentum before the virus hit.  Incoming data will not capture ongoing corona-virus impacts, but it will show the economy is on a solid footing.

The drop in rates will likely be short lived, and will rise once the virus is contained.  Now is a good opportunity to reevaluate any long-term interest rate obligations you have, and consider hedging through the use of a swap or cap.