[Good Morning Market] Amid COVID-19 Fears... US Fed Abruptly Cuts Benchmark Interest Rate

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] As the novel coronavirus infection (COVID-19) spreads globally, raising concerns about a slowdown in the global economy, the U.S. Federal Reserve (Fed) on the 3rd (local time) through the Federal Open Market Committee (FOMC) abruptly cut the benchmark interest rate by 50 basis points from the previous 1.50-1.75% to 1.00-1.25%. After signaling a monetary authority-level move to respond to last week's sharp stock market plunge, the Fed held an emergency meeting instead of a regular one to lower the rate. Despite the Fed's rate cut, the U.S. stock market fell again. This was due to a lack of concrete policy announcements from the G7, and analysts say that for market stability, active stimulus policies from major countries must accompany the efforts.

◆Daehun Han, SK Securities Researcher=The Fed urgently cut the benchmark interest rate by 50 basis points to 1.00-1.25%. This is the first time since the 2008 financial crisis that the Fed has cut rates outside of a scheduled regular meeting. It reflects a preemptive response to the shock that COVID-19 could trigger. Given the Fed's drastic measure and the expected policy coordination among major central banks, the policy's strength is likely to contribute to financial market stability this time as well.

Although the Fed's surprise announcement was made, the U.S. stock market sharply declined again after one day. The decline was partially recovered on expectations of G7 policy coordination, but disappointment arose due to insufficient concrete policy announcements from the G7 and the Fed's intervention being limited to the rate cut. Ultimately, for market stability, an active joint economic stimulus front from the G7 is needed, and the U.S. must accompany additional measures such as quantitative easing (QE) beyond the rate cut. The effectiveness of further rate cuts at historically low levels is limited. Moreover, indicators confirm that COVID-19 is adversely affecting the global economy.

The Fed has fired the first signal shot, and policy packages for economic stimulus from various countries are expected to continue emerging. Paradoxically, the weaker the economic indicators, the stronger the policy intensity may become. In this regard, the upcoming U.S. ISM Services Index release is important. From an investor's perspective, it is time to increase stock investment weights centered on existing leading sectors (semiconductors, platforms, IT software). Leading sectors do not change easily, and COVID-19 is expected to impact our life patterns, with the 'new economy' at the center.

◆Dongrak Gong, Daishin Securities Researcher=This Fed benchmark interest rate cut is interpreted as a measure to block financial market anxiety caused by concerns over COVID-19 spread and the sharp stock market plunge. It is also evaluated as indicating a very strong level of measures that monetary authorities can take. Therefore, additional rate cuts are expected beyond this emergency cut.

First, it is noteworthy that the Fed's rate cut was made through an emergency meeting rather than a regular meeting. The last time the benchmark rate was changed urgently was during the financial crisis, which indicates the urgency of the situation.

Second, the rate cut magnitude was 50 basis points, not the so-called 'baby step' of 25 basis points. Like the emergency meeting rate change, this is also the first such measure since the financial crisis.

Further rate cuts of 50 basis points are expected. It is anticipated that rates will be further cut at the March regular meeting, with another cut expected at subsequent meetings. Considering that the financial market has not yet stabilized immediately after this rate cut, the possibility of another 50 basis point cut at once, as this time, cannot be ruled out.