WASHINGTON—The Federal Reserve made an emergency half-percentage-point rate cut on Tuesday, reflecting concern that the spreading coronavirus epidemic will hit U.S. and global growth in the months ahead.
Tuesday’s action lowered the federal-funds rate to a range between 1% and 1.25%. It was the first rate cut in between scheduled policy meetings since the 2008 financial crisis. The Fed has typically reserved such actions for times when the economic outlook has quickly darkened, as it did in early 2001 and early 2008, when the U.S. economy was heading into recession.
The action was approved unanimously Tuesday morning after the rate-setting committee met by videoconference on Monday night. In a statement, officials held out the prospect of additional cuts by pledging to “act as appropriate” to support the economy.
“The virus and measures being taken to contain it will weigh on economic activity here and abroad for some time,” Fed Chairman Jerome Powell said at a hastily arranged press conference on Tuesday.
The Fed’s action came after central banks in Australia and Malaysia cut rates and finance ministers and central bank governors from the Group of Seven countries said they stand ready to cooperate. The Bank of Canada is expected to cut rates at their policy meeting Wednesday.
Stocks slumped after rising sharply on Monday in anticipation of future policy stimulus. In early afternoon trading, the S&P 500 was down 2.7% and yields on the benchmark 10-year Treasury fell below 1%, to a record low.
Mr. Powell said the central bank wanted to prevent uncertainty about the virus from leading to a pullback in lending by banks or bond investors to households and firms. The Fed’s actions could also shore up consumer and business confidence, he said.
“A rate cut will not reduce the rate of infection. It won’t fix a broken supply chain. We get that,” Mr. Powell said. “But we do believe that our action will provide a meaningful boost to the economy.”
While this shock isn’t primarily economic in origin, Fed officials recognized it would hit U.S. growth, especially if steps to mitigate the spread of the virus—school and business closures, canceled public events and social behavior broadly speaking—curtailed consumption. Even if the shock is temporary, there are big unknowns over how long it will last and how deep output might decline.
While an interest-rate cut won’t address the cause of the downturn, it could soften damage to spending and confidence, stem financial-market disruptions and speed a recovery once any epidemic is under control.
“The Fed wants to create an environment for financial conditions where it can buffer the shock we’re going to get instead of exacerbating it,” said Tiffany Wilding, an economist at Pacific Investment Management Co. She said recession risks were elevated enough “to warrant a Federal Reserve shock-and-awe approach.”
Recessions can develop after financial markets reduce risk taking, amplifying an unanticipated shock to demand. For example, new corporate debt issuance has ground to a halt since last week’s market volatility.
One question now is whether weak businesses across the economy can ride out any temporary drop in consumer spending. If those firms can’t weather even a short-lived disruption, “you have business failures, unemployment rates increasing—that’s what we don’t want to see,” said Ms. Wilding.
Michael Feroli, chief U.S. economist at JPMorgan Chase, said Monday he now saw a 50% chance the Fed was forced to cut rates this year to zero, up from a 33% chance last week.
Economists at Goldman Sachs see the U.S. avoiding a recession for now but have downgraded the U.S. growth forecast to an annualized rate of 0.9% in the first quarter and 0% in the second quarter.
President Trump has in recent days called on the Fed to cut rates. After the Fed’s announcement on Tuesday, Mr. Trump said the central bank needed to do more. “The Federal Reserve is cutting but must further ease,” he said on Twitter. “More easing and cutting!”
Mr. Powell said the Fed wasn’t responding to political pressure with Tuesday’s rate cut. “The ultimate solutions to this challenge will come from others, particularly health professionals,” he said. “The virus outbreak is something that will require a multifaceted response.”
Mr. Powell also said it was difficult to tell how long or deep any disruptions to economic output would be. “We will get to the other side of this,” he said.
The Fed’s response shows how policy makers are bracing for greater economic distress from a contagious, flulike virus than seemed possible just a week ago.