Federal Reserve cuts interest rates to zero to fight virus slowdown

  • The Federal Reserve cuts fed funds rate to 0-0.25% to stem crisis
  • Pledges $700 billion in quantitative easing measures
  • Loosens reserve requirement for banks

In its latest move to wield monetary policy to combat the economic impact of the coronavirus, the Federal Reserve, on Sunday, lowered the federal funds rate to 0-0.25%, a 1% cut from current levels. The Fed also announced a massive quantitative easing program and cut reserve requirements for banks to blunt the economic impact from the effects of the virus.

In a statement announcing the moved, the Federal Reserve said, “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected.”

The Fed also slashed the rate of emergency lending at the discount window for banks by 1.25% to 0.25%, and lengthened the term of loans to 90 days. The Fed also cut reserve requirements for thousands of banks to zero. In addition, the Fed announced a coordinated move by other central banks with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank to enhance dollar liquidity around the world through existing dollar swap arrangements.

The quantitative easing will take the form of purchases of $500 billion of Treasury bonds and $200 billion of agency-backed mortgage securities. The Fed said the purchases will begin Monday with a $40 billion installment.

These moves, reminiscent of stop-gap measures the Fed took during the financial crisis of 2008-09, are aimed at insuring that there is ample liquidity in the financial system, especially between banks. A tightening of lending as the economy heads into a likely recession could make the downturn even more severe.

U.S. market futures fell 3% as overnight trading opened Sunday evening. This follows one of the most volatile weeks in market history as U.S. markets fell into bear territory as the crisis deepened and major cities and entire countries went on lockdown.

President Trump, who has been critical of the Fed since he appointed Jerome Powell as Fed Chair, praised the central bank for responding to the crisis in a press conference Sunday afternoon. “I didn’t expect this, and I like being surprised,” he said.

The Fed’s actions today follow other moves the central bank has made over the past two weeks including a 0.50% emergency rate cut and expanding its lending to the overnight repo markets for banks of up to $1.5 trillion.

Related Posts