Fed cuts rates to zero, agrees to buy more bonds
Fed cuts interest rate to zero as coronavirus shakes economy
The Federal Reserve has made a historic flex in the fight against the coronavirus.
USA TODAY, Wochit
The Federal Reserve deployed much of its arsenal on Sunday to tackle the economic damage caused by the coronavirus, cutting short-term interest rates to zero, renewing its bond purchases during the crisis to inject liquidity in the financial system and by encouraging more bank lending to households and businesses.
These measures, which have been applauded by President Donald Trump, are aimed at tackling a now likely US recession.
“The virus presents significant economic challenges,” Powell told reporters on a teleconference. “We have taken a number of steps to support American families and the economy in general.”
Central bank policymakers agreed to lower the Fed’s benchmark federal funds rate by a full percentage point to a range of zero to 0.25% – where it hovered for years during and after the 2008 financial crisis.
“The coronavirus epidemic has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed said in a statement. “The effects of the coronavirus will weigh on economic activity in the short term and pose risks to the economic outlook. “
The Fed had already cut its key rate by half a percentage point earlier this month. Many economists expected the central bank to accept another percentage point cut at a meeting that had been set for this week, but the Fed decided to act early in a historic show of force .
The central bank is also renewing its bond buying campaign, saying it will buy $ 500 billion in Treasury bonds and $ 200 billion in mortgage-backed securities. The Fed has said it will reinvest these products instead of letting them off the books. Powell said the Fed was acting primarily to inject money into a tightened Treasury market as investor fears grew. This market is essential to a well-oiled financial system.
Although the Fed last week made $ 1.5 trillion in short-term loans to revive the stalled Treasury and other asset markets, it has had limited success and therefore decided to proceed. directly to bond purchases, Powell said.
But the purchases will also lower rates on mortgages and other consumer and business loans, as did the Fed’s more than $ 3 trillion in bond purchases during and after the financial crisis. But with long-term rates at historically low levels, some economists have questioned the effectiveness of a new program.
“The Federal Reserve is ready to use its full range of tools to support credit flows to households and businesses and thus promote its maximum employment and price stability targets,” the Fed said.
“Great news, but not enough on its own,” Pantheon Macroeconomics economist Ian Shepherdson wrote of lowering rates and buying bonds in a note to clients. He said Congress must do more than the package the House passed on Friday night to help Americans whose health and jobs have been affected by the outbreak.
“We believe the Fed has acted now to try to forestall what will likely be terrible news about the spread of the virus, both inside and outside the United States, over the next two weeks.” , Shepherdson said.
But Dow futures fell nearly 900 points after the Fed’s announcement.
“The Fed is trying to be preventative to calm the markets, but what worries me is that they have unloaded the gun and there are no more bullets. If the markets don’t react calmly to this, they’ll take it as a sign of fear and desperation, ”said Nick Giacoumakis, president of New England Investment & Retirement Group.
Powell, however, said “we think we have a lot of political space left” and “a lot of powerful tools,” citing additional asset purchases and advice on how long he can hold interest rates down. ‘interest close to zero.
He said he expects US economic output to decline in the second quarter. “After that, it becomes difficult to say and it will depend on” the course that the coronavirus takes. “Economic data will follow data on the spread of the virus. “
The Fed, meanwhile, is also encouraging America’s biggest banks to use their more than $ 4 trillion in post-crisis capital buffers to lend money to households and businesses. These pads were designed to guard against another financial crisis.
The central bank is also taking several measures “to support credit flows to households and businesses”. It lowers its “discount window” rate, the interest it charges banks for short-term loans, from 1.5 percentage points to 0.25%.
And to further strengthen lending, the Fed is reducing the level of reserves it requires banks to hold to zero.
The Fed – along with the central banks of Europe, England, Canada, Japan and Switzerland – also announced a coordinated effort to strengthen liquidity exchanges “to ease tensions in funding markets. global “. It can be difficult for foreign central banks to lend to their financial institutions in US dollars, the world’s reserve currency, if they experience serious economic and financial difficulties. Swaps, which central banks also used during the financial crisis, aim to ease this tension.
Trump applauded the Fed’s decision to cut rates, saying “it makes me very happy.”
“It’s a big step, and I’m very happy they took it,” Trump said at a White House press conference with his coronavirus task force.
Trump criticized the Fed and President Jerome Powell, whom he appointed president in 2017. Trump argued that interest rate hikes had slowed economic growth.
On Saturday, he again complained that the central bank was not “proactive” and did not do enough to calm financial markets amid the coronavirus pandemic. “Our Fed is not doing what it should be doing,” he said.
But after Sunday’s decision to cut rates to zero, criticism of Trump has given way to praise.
“I think there are a lot of people on Wall Street who are very happy,” he said. “I can tell you that I am very happy. I did not expect that.
With breathtaking speed, the virus has become an imminent threat to the 11-year-old economic expansion. Many economists say a recession is inevitable and some believe the country is already in a recession.
Initially, the outbreak slowed the delivery of parts and retail products from China and hit the travel industry as businesses and consumers canceled conferences and travel. But across the country, the pandemic in just a few days led many Americans to avoid crowds and public places, quickly attacking malls, restaurants, movie theaters and sports arenas.
That, along with other economic issues, is expected to lead to layoffs that could further hurt consumer spending in a toxic cycle. Banks are likely to suffer and some companies are struggling to repay their loans, which could cause banks to curtail their lending and further exacerbate the crisis.
Much of the Fed’s measures are designed to keep money flowing to small and large businesses that need liquidity to keep operating until the crisis subsides in weeks or months. There have been more than 162,000 cases of coronavirus worldwide and 6,000 deaths. In the United States, there have been over 3,200 cases and a death toll of over 50.
“We don’t have the tools to reach individuals, small businesses, and people who might be out of work,” Powell said. This is, he said, the role of Congress.
Contribution: Michael Collins and Jessica Menton