The main US stock market indexes have inched lower in volatile trading, as investors worried even a shock emergency interest rate cut might not be enough to shield the world’s largest economy from the impact of the coronavirus epidemic.
The US Federal Reserve’s decision to lower borrowing costs before its next scheduled policy meeting in mid-March reflected the urgency with which the central bank felt it needed to act to stave off a global recession.
Shares initially jumped more than one per cent on the news of the half-point rate cut on Tuesday.
But they quickly turned negative before settling between flat and 0.2 per cent lower on the day as analysts and traders worried whether pumping more money into banks and financial markets may not address the central problem of the epidemic – a cut in business activity as workers and consumers stay home.
Michael O’Rourke, a strategist with Jones Trading in Stamford, Connecticut, said the rate cut was an error.
“The Fed panicked which they’re very good at doing and it was a mistake,” he said.
“The Fed cutting rates by 50 basis points now is not going to get people to go to the movies or to conferences, sporting events or any large gatherings.”
The US central bank cut rates three times in 2019 and has since held the fire amid signs of improving growth after the striking of a “Phase One” trade deal between the US and China.
The main US stock indexes had closed more than four per cent higher on Monday after their worst week since 2008, as central banks in Japan and the EU joined the Federal Reserve in signalling further monetary easing.
Earlier in the day, finance ministers of the G7 and central bank governors said only that they stood “ready to take actions, including fiscal measures where appropriate”.
Bank stocks, which tend to outperform in a higher interest rate environment, dropped 2.2 per cent while the broader financials sector fell 1.5 per cent. Nine of the 11 major S&P sectors were trading higher.
Chris Zaccarelli, chief investment officer from Independent Advisor Alliance, Charlotte, NC, said the Fed clearly doesn’t want to fall behind the curve.
“They’re trying to be proactive and front-load their response both by cutting 50 bps instead of their usual 25 bps as well as by cutting intra-meeting instead of waiting until later this month,” he said.