In a statement, the central bank said it was cutting rates by a half percentage point to a target range of 1 per cent to 1.25 per cent.
“The fundamentals of the U.S. economy remain strong. However, 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,” the Fed said a statement.
The decision was unanimous among policymakers.
The Fed’s decision to cut interest rates before its next scheduled policy meeting on March 17-18 reflects the urgency with which the Fed feels it needs to act in order to prevent the possibility of a global recession.
The move comes shortly after the G-7 group of major world economies pledged to use “all appropriate tools” to deal with the spreading coronavirus.
The joint statement from the United States, Japan, Germany, Britain, France, Italy and Canada said it was “ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy.”
The G-7 has issued similar statements during periods of market turmoil, such as the Sept. 11, 2001 terrorist attacks.
U.S. stocks indexes surged on Tuesday on news of the Fed rate cut.
At 10:02 a.m. ET, the Dow Jones Industrial Average was up 319.24 points, or 1.20 per cent, at 27,022.56, the S&P 500 was up 38.33 points, or 1.24 per cent, at 3,128.56. The Nasdaq Composite was up 100.59 points, or 1.12 per cent, at 9,052.75.
In Toronto, the S&P/TSX composite index was up 135 points, or 0.82 per cent, to 16,688 at 10:01 a.m. ET.
A number of economists now expect the Bank of Canada to implement its own interest rate cut at its next meeting on Wednesday, March 4. Analyst forecast a quarter of a percentage point cut from 1.75 per cent to 1.50 per cent.
— With files from the Canadian Press and Global News’ Erica Alini