The Federal Reserve announced today it would drop interest rates to zero and buy at least $700 billion in government and mortgage-related bonds as part of a wide-ranging emergency action to protect the economy from the impact of the coronavirus outbreak.
The moves, the most dramatic by the U.S. central bank since the 2008 financial crisis, are aimed at keeping financial markets stable and making borrowing costs as low as possible as businesses around the country close and the U.S. economy hurtles toward recession.
The Fed, led by Chair Jerome Powell, effectively cut its benchmark by a full percentage point to zero.
The benchmark U.S. interest rate is now in a range of 0 to 0.25 percent, down from a range of 1 to 1.25 percent.
In addition to rate cuts, the Fed announced it is restarting the crisis-era program of bond purchases known as “quantitative easing,” in which the central bank buys hundreds of billions of dollars in bonds to further push down rates and keep markets flowing freely. the Fed is also giving more generous loans to banks around the country so they can turn around and offer loans to small businesses and families in need of a lifeline.
“Economic policy experts must do what we can to ease hardship caused by the disruption to the economy,” Powell said in a 45-minute conference call Sunday evening. “We are prepared to use our full range of tools to support the flow of credit to households and businesses.”
Powell said Fed leaders met Sunday afternoon because they anticipate a “significant effect” on the U.S. economy in the coming months, including negative growth in the second quarter.
Their goal is to do all they can to help the nation “weather this difficult period” and “foster a more vigorous return to normal once the disruptions from the coronavirus abate,” he added.
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President Trump, who has been relentlessly pushing the central bank to take more action, congratulated the Fed and said its decision to lower interest rates “makes me very happy.”
In the coming months, the Fed will purchase at least $700 billion more in bonds as part of its new quantitative easing.
The majority of the buying, at least $500 billion, will be U.S. Treasury bonds.
The rest will be mortgage-backed securities, an effort to stabilize home loans.
The Fed’s actions Sunday come on the heels of an emergency interest rate cut on March 3 and a large $1.5 trillion injection into the bond market last week to ensure sufficient liquidity.
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The ultra low interest rates are expected to remain until the U.S. economy recovers from the coronavirus downturn.
“The [Fed] expects to maintain this target range until it is confident that the economy has weathered recent events,” the central bank wrote in a statement.
Layoffs have already begun across the country as large and small businesses see a dramatic decrease in sales.
The Dow Jones industrial average remains in bear market territory after the swiftest 20 percent plunge in U.S. stock market history.
By deploying much of its arsenal Sunday, the Fed left open the risk that even these moves would prove inadequate and it would have to take further measures later on. While the Fed could launch more bond purchases or do other experimental actions to try to drive rates lower, it’s not clear what else the Fed could try that would significantly alter the economy’s path.
America’s largest banks announced shortly after the Fed move that they will stop repurchasing their shares and use that money to make loans to customers instead.
The banks include JPMorgan Chase, Bank of America Corp, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street.
“The covid-19 pandemic is an unprecedented challenge for the world and the global economy and the largest U.S. banks have an unquestioned ability and commitment to supporting our customers, clients and the nation,” the banks said in a statement.
In his conference call, Powell tried to emphasize the U.S. economy was in good shape before the pandemic hit, and he added that he is personally feeling fine and has not felt the need to get tested for covid-19.
“The economic outlook is evolving on a daily basis and it really is depending heavily on the spread of the virus,” Powell said. “That is just not something that is knowable.”
Trump has urged the Fed to make the nation’s interest rates negative, something that has never happened before in the United States.
Negative rates work by effectively paying borrowers to take out loans and requiring people and businesses that deposit money to pay a fee rather than earn interest.
Europe and Japan have tried negative rates with mixed success.
“They are not out of tools, but they’ve used the biggest tool they have, the interest rate tool, the one that’s been proven over the years to work the most effectively,” said Don Kohn, the former Fed vice chair during the 2008 financial crisis. “Even if they did go below zero, they wouldn’t be able to go far below zero.”
After the Fed cut rates two weeks ago, markets sold off on fears the economy was in a faster nose-dive than originally believed.
That appeared to be happening again as stock markets around the world prepared to open sharply down on Monday.
“The Fed and other central banks have gone all out to aid the world economy today,” wrote Chris Rupkey, chief financial economist at MUFG Bank. “Some times the massive Fed interventions have generated even more panic selling in the markets as it shows the severity and concern of Fed officials of just how bad the risks are to the economy.”