To help support the economy as the nation grapples with the coronavirus, the Federal Reserve announced today its decision to take a number of actions (here), including lowering the fed funds target rate to 0 to 1/4%, increasing its holdings of Treasury securities and agency mortgage-backed securities, and taking coordinated measures with foreign central banks (I've written about the Fed's use of central bank swap lines, here).  Today’s announcement is the Fed's second interest rate cut in two weeks.  On March 3, 2020, it lowered the fed funds target rate to 1 to 1.25%.  Economist Carola Binder recently posted (here) an interesting paper, Coronavirus Fears and Macroeconomic Expectations, related to this first March 2020 interest rate cut.  Here’s the abstract:

The Federal Reserve cut interest rates by 50 basis points on March 3, 2020, in response to concerns about the coronavirus (COVID-19). On March 5 and 6, I conducted an online survey of over 500 U.S. consumers that asked about their attention to, concerns about, and responses to the coronavirus, their awareness of the Fed's policy move, and their inflation and unemployment expectations. I then provided respondents with information about the Fed's policy announcement, and re-elicited inflation and unemployment expectations. Most consumers were somewhat or very concerned about effects of coronavirus on the U.S. economy, their health, and their personal finances; 28% had cancelled or postponed travel and 40% purchased food or supplies in response to these concerns. About 38% were aware that the Fed had cut interest rates. I show how concerns and awareness of the rate cut depend on consumer characteristics and news sources. Greater concern about coronavirus is associated with higher inflation expectations and more pessimistic unemployment expectations. Provision of information about the Fed announcement leads some consumers to become more optimistic about unemployment and revise inflation expectations downward, consistent with recent research showing that many consumers associate bad times with high inflation.   

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Photo of Colleen Baker Colleen Baker

PhD (Wharton) Professor Baker is an expert in banking and financial institutions law and regulation, with extensive knowledge of over-the-counter derivatives, clearing, the Dodd-Frank Act, and bankruptcy, in addition to being a mediator and arbitrator.

Previously, she spent time at the U. of…

PhD (Wharton) Professor Baker is an expert in banking and financial institutions law and regulation, with extensive knowledge of over-the-counter derivatives, clearing, the Dodd-Frank Act, and bankruptcy, in addition to being a mediator and arbitrator.

Previously, she spent time at the U. of Illinois Urbana-Champaign College of Business, the U. of Notre Dame Law School, and Villanova University Law School. She has consulted for the Federal Reserve Bank of Chicago, and for The Volcker Alliance.  Prior to academia, Professor Baker worked as a legal professional and as an information technology associate. She is a member of the State Bars of NY and TX. Read More

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