US Fed Announces Emergency Rate Cut, Hong Kong Follows Suit

The monetary authority of Hong Kong followed the footsteps of the US Federal Reserve and slashed the base lending rate by 50 basis points today. Notably, on Tuesday, the US Federal Reserve announced an emergency interest rate cut to negate the negative impact of coronavirus outbreak on the US economy.

The US Fed justified its emergency rate cut with the following statement:

“The coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point.”

The interest rate cut was the deepest since the fall of Lehman Brothers in 2008, triggering worldwide financial crisis.

Following the announcement, the 10-year Treasury yield hit 1.09% while the US stocks saw another round of heavy selloff. Fed funds futures are now signaling over a 1% rate cut for this year, including another 25 basis points benchmark rate cut in the first half of 2020.

The US Fed also stated that it is “closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

Notably, the rate cut was announced hours after the Fed Chair Jerome Powell and finance heads from the G7 nations stated that they would “use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks.”  

The decision to slash interest rate to a range of 1% to 1.25% was unanimous. The Fed also stated that the “fundamentals of the U.S. economy remain strong.”

The rate cut also signals a sharp change of stance by Powell and his team. Earlier, they had forecast no change in benchmark rates in 2020. Last year, the benchmark interest rate was hiked thrice to a range of 1.50% to 1.75%.

Notably, a week earlier, Fed Vice Chairman Richard Clarida had mentioned that they thought it was too early to take measures against the virus. Clarida, however, pointed out that monetary policy was already loose and the fundamentals of the economy remain strong with unemployment hovering near 50-year low. Notably, the US legislators are drafting a $7.50 billion virus response bill, but can take weeks for approval by Congress.

Goldman Sachs believes that the Fed would ultimately slash the benchmark interest rate by a total of 100 basis points in the first half of 2020 as the world economy shrinks.

Today morning, Hong Kong Monetary Authority, the de facto central bank, followed suit by announcing a 50 basis points rate cut to 1.5%. The rate cut will take immediate effect as per the statement released by the HKMA.

Last year, the HKMA has implemented three rate cuts totaling 75 basis points, after nine successive rate hikes totaling 225 basis points between 2015 and 2018.

In a statement accompanying the rate cut, HKMA said “The Fed decided to have an inter-meeting rate cut by half a percentage point and emphasise that it would use monetary policy to support the economy.”

HKMA chief executive Eddie Yue Wai-man said “The outbreak has created a lot of uncertainty in financial markets. Markets will continue to be volatile and investors need to take sound risk management measures.”

Last week, the Hong Kong government rolled out a record HK$139 billion ($17.80 billion) budget deficit to assist revitalize the economy. In addition to the US-China trade war and anti-government demonstrations, the coronavirus outbreak has considerably affected tourist arrivals and retail sales in Hong Kong. So far, the virus has affected 100 people and two have lost their lives.