In response to the coronavirus from China, the Federal Reserve unanimously voted to lower its benchmark interest rate by 50 basis points this morning. But what does that mean and why should you care? Well to start, it’s the largest Fed rate cut since the 2007-08 financial crisis. And the decision to bring the rate from 1.75% to 1.25% represents the central bank’s awareness that the coronavirus is weighing on global economic activity.
In a statement announcing the decision, the Fed said that in light of coronavirus risks, the new target range for the benchmark federal funds rate will encourage high levels of employment and price stability. It’s no secret that economic activity is already hurting. Several major companies have lowered first-quarter guidance as the virus spread. And last week’s market selloff broadly stoked investor fear.
Fed Rate Cut Rallies Stock Market
But what does the rate cut mean for the stock market? Consumers should have a bit more in their pockets to spend. Stocks began to reverse this morning’s losses after the rate cut. Now, the S&P 500, Dow Jones Industrial Average and Nasdaq Composite are all in the green ahead of Fed Chairman Jerome Powell’s 11 a.m. press conference.
It’s unclear exactly how the lowered rate will affect spending, but several analysts and President Donald Trump had been calling for this emergency action. Other centrals banks, including Australia’s, have already made similar moves.
And finally, what is this benchmark interest rate? The federal funds rate is what banks charge each other to make overnight loans. This rate in turn influences short-term rates for things that affect day-to-day life. This laundry list includes home and auto loans and credit card rates. For investors, these short-term rates matter, and rate cuts typically leave stocks in the green.
Today’s Fed rate cut might just been the cure for investors’ market fears.
Sarah Smith is a Web Editor for InvestorPlace.com.