Fed slashes rates, eases rules
WASHINGTON — The Federal Reserve took emergency action Sunday to help the economy withstand the coronavirus by slashing its benchmark interest rate to near zero and saying it would buy $700 billion in Treasury and mortgage bonds.
The Fed’s surprise announcement signaled its concern that the viral outbreak will depress economic growth in the coming months and that it’s prepared to do whatever it can to counter the risks. It said it would keep its key rate at a range between zero and 0.25% until it feels confident that the economy can survive what’s become a sudden near-shutdown of economic activity in the United States.
The central bank will buy $500 billion of Treasury securities and $200 billion of mortgage-backed securities — 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 ratesdown.
By aggressively slashing its benchmark short-term rate to near zero 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 record-low level.
Some of the Fed’s new steps are intended to free up money for banks to lend. As businesses across the country see their revenues dwindle as consumers stay home, they will seek short-term loans to maintain their payrolls. The Fed said it has dropped its normal requirement that banks hold cash equal to 10% of its customers’ deposits, allowing banks to lend those funds.
“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” the central bank said.
“It confirms that the Fed sees the economy going down … very sharply” toward recession, Adam Posen, president of the Peterson Institute for International Economics, said.
All told, the Fed’s actions amount to a recognition that the U.S. economy faces its most perilous juncture since the recession ended more than a decade ago.