Fed takes emergency steps to slash rates and ease bank rules
THE FEDERAL Reserve took emergency action Sunday to help the economy withstand the novel coronavirus by slashing its benchmark interest rate to near zero and saying it would buy US$700 billion in Treasury and mortgage bonds.
The Fed’s surprise announcement signalled its concern that the viral outbreak will depress economic growth in coming months and that it is prepared to do whatever it can counter the risks. It cut its key rate by a full percentage point — to a range between zero and 0.25 per cent — and said it would keep it there until it feels confident that the economy can survive a sudden near-shutdown of economic activity in the United States.
The central bank will buy US$500 billion of Treasury securities and $200 billion of mortgage-backed securities. This amounts to an effort to smooth over market disruptions that have made it hard for banks and large investors to sell Treasuries, as well as to keep longer-term rates borrowing rates down. The disruptions in the Treasury market sent the yield on the 10-year Treasury rising last week, an unusual move that threatens to swell borrowing costs for mortgages and credit cards.
On Sunday evening, US stock futures began falling after the Fed’s announcement. Futures for the S&P 500 index dropped four per cent, while futures for the Dow industrials fell by 3.7 per cent.
All told, the Fed’s massive response is intended to keep financial markets functioning and lending flowing to businesses and consumers. Otherwise, as revenue dries up for countless small businesses that have suddenly lost customers, these employers could be forced to lay off workers or even seek bankruptcy protection in some cases.
“This is a break-the-glass moment” for the Fed, said Mark Zandi, chief economist at Moody’s Analytics. “They are throwing everything they’ve got at this. My sense is they must be nervous about the credit system not functioning properly. They are trying to shore up confidence.”
By aggressively slashing its benchmark short-term rate and pumping hundreds of billions of dollars into the financial system, the Fed’s moves Sunday recalled the emergency action it took at the height of the financial crisis. Starting in 2008, the Fed cut its key rate to near zero and kept it there for seven years. The central bank has now returned that rate which influences many consumer and business loans - to its recordlow level.