Federal Reserve Chairman Jerome Powell on Friday afternoon issued a rare inter-meeting statement hinting at rate cuts as he tried to calm jitters about the global spread of coronavirus.
“The fundamentals of the U.S. economy remain strong,” Powell said. “However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”
Powell issued the statement two hours before the close of trading on Wall Street. It was enough to erase a portion of the worst stock retreat since 2008. It’s rare for the Fed to comment on issues outside of their scheduled meetings or speeches.
As a result of the stock selloff, the 10-year U.S. Treasury yield plunged to a record low on Friday, after falling 30 basis points during the week, as investors looked for safe havens.
The increase in competition for bonds is a signal that mortgage rates, which track Treasury yields, could be heading to record lows.
Mortgage rates would need to tumble 15 basis points to set an all-time low. The rate this week fell to 3.45%, matching a three-year low set earlier in February, according to Freddie Mac. The lowest rate ever recorded was 3.31% in November 2012.
Michael Feroli, chief U.S. economist at JPMorgan Chase, told Bloomberg News that Powell’s statement indicates an interest-rate cut is “squarely on the table” at the Fed’s March 17-18 meeting.
“I think this is a step in the right direction to help calm some of the concerns,” he said. “This is important in that they’re saying they’re not going to be stubborn here.”
The Fed doesn’t have much gunpowder left after three quarter-point cuts last year. Rate cuts are intended to bolster bad economies, and the Fed has already used up some of its firepower to support a slowing expansion. The current Fed rate target range is 1.5% to 1.75%.
What the Fed didn’t do, however, was give in to repeated demands from President Donald Trump to slash rates to below zero. Fed governors withstood a torrent of presidential name-calling – the tweeted insults included “boneheads” and “clueless.”
If the Fed had slashed its rate to zero or below, there would be little Powell could offer now, in the face of a global crisis, to support the U.S. economy.