Fed slashes rates, eases bank rules
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 to 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 mortgage-backed 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. Chairman Jerome Powell, in a conference call with reporters, declined to characterize the Fed’s new purchases as QE. He said their main goal was to ensure that credit markets could function properly. But the new bond purchases could also drive down borrowing rates and help the economy, as QE did, he said.
Powell also warned that the economy would likely shrink in the April-June quarter because of the widespread shutdowns from the coronavirus and a broad pullback in consumer spending. He noted that the necessary steps being taken across the country to stem the outbreak — an avoidance of travel, shopping and mass gatherings — are inherently harmful to the economy, which he said had been in solid shape before the virus hit.
“The virus is having a profound effect on the people of the United States and across the world,” Powell said.
While the primary response will need to come from health care providers, “economic policymakers must do what we can to ease hardship caused by disruptions to the economy, and support a swift return to normal once they’ve passed.”
The chairman added that Sunday’s deep interest rate cut would help companies that need credit now but would be particularly useful after the virus outbreak has largely subsided. He said that there was no set timetable for the $700 billion in securities’ purchases and that they would occur as needed.
The Fed is also joining in a coordinated global action — with 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.
All told, the Fed’s massive response is intended to keep financial markets functioning and lending flowing to businesses and consumers.
“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.”