Fed takes emergency action, slashes rates

Stock futures fall on announcement

WASHINGTON — The Federal Reserve took massive 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 worry 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% — and said it would keep it there until it feels confident that the economy can survive a sudden nearshutdown of economic activity in the United States.

The central bank will buy at least $500 billion of Treasury securities and at least $200 billion of mortgagebacked securities. This amounts to an effort to ease market disruptions that have made it harder for banks and large investors to sell Treasuries as well as to keep longer-term rates borrowing rates down. The new purchases will be similar to the several rounds of “quantitative easing,” or QE, that the Fed conducted during and after the Great Recession to bolster the financial system and the economy.

The Fed is also joining in a coordinated global action with the the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank to provide cheap dollar credit to banks. This move is intended to ensure that foreign banks continue to have access to dollars that they lend to overseas companies.

In an audio news conference Sunday night, Chairman Jerome Powell explained the Fed’s actions, in part, by noting that “when stresses arise in the Treasury market, they can reverberate throughout financial markets and the entire economy.”

U.S. stock futures began falling after the Fed’s announcement. Futures for the S&P 500 index dropped 4%, while futures for the Dow Jones Industrial Average fell 3.7%.

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 shortterm 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 record-low level.

The move drew rare praise from President Donald Trump, who had attacked the Fed as recently as Saturday, as he has frequently, for not acting quickly or aggressively enough.

“It makes me very happy,” Mr. Trump said as he opened a White House briefing on the coronavirus. “I think that people and the markets should be very thrilled.”

As more businesses across the country see their revenue dwindle as consumers stay home, many of them 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, thereby allowing banks to lend that money instead. It also said banks can use additional cash buffers that were imposed after the 2008 financial crisis for lending.

“The Federal Reserve,” its statement Sunday said, “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.”

“It confirms that the Fed sees the economy going down ... very sharply’’ toward recession, said Adam Posen, president of the Peterson Institute for International Economics.