US Fed cuts key interest rate to 0-0.25% amid pandemic
New BoE governor Bailey promises more ‘prompt action’ when needed
WASHINGTON: Faced with a growing economic shutdown from the global new coronavirus pandemic, the US Federal Reserve on Sunday announced drastic emergency measures to shore up confidence and keep the financial sector running, including slashing the key interest rate to virtually zero.
The Fed made its second emergency rate cut in less than two weeks, cutting the benchmark borrowing rate to a range of 0-0.25 percent, where it was during the 2008 global financial crisis, and pledged to keep it there “until it is confident that the economy has weathered recent events.”
The central bank also announced massive asset purchases, opened its discount lending windows to banks and urged them to use it to help businesses and households. In another move, it removed bank reserve requirements to allow them to use cash backstops. President Donald Trump, who has been critical of the independent Fed for not acting more aggressively, praised the moves. “What’s happened with the Fed is phenomenal news,” Trump said at a regular briefing of his coronavirus task force.
“It’s a tremendous thing that took place just now,” he said. “I can tell you, I’m very happy. I didn’t expect this. And I like being surprised.” In addition, the Fed joined forces with other major central banks to guarantee the global financial system has enough cash to continue to operate. The action was coordinated with the European Central Bank, Bank of England, Bank of Japan, Bank of Canada and the Swiss National Bank.
“The swap lines are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets,” a statement said. The massive show of financial force as more countries are on lockdown due to the spread of the COVID-19 illness aims to contain the economic fallout as businesses are forced to shut their doors, in an already sluggish global economy.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed’s policysetting Federal Open Market Committee said in the statement following the emergency meeting.
It said it “will use its tools and act as appropriate to support the economy,” though what tools it has left is a question. One FOMC member dissented from the vote. Cleveland Fed President Loretta Mester objected only to the move to take the federal funds rate nearly to zero.
Meanwhile, new governor Andrew Bailey promised that the Bank of England would deliver further “prompt action” when needed to help Britain’s economy weather the hit from the global coronavirus pandemic. Bailey, who succeeded Mark Carney as governor yesterday, told BBC News that the BoE was “very keen” to ensure that short-term damage to the economy did not permanently damage Britain’s longer-term growth prospects. “That’s why you saw prompt action last week, that’s why you will see prompt action again when we need to take it, and the public can be assured of that,” he said in his first public comments since taking over as governor. On Wednesday last week, the BoE launched emergency credit measures to prevent a wave of corporate bankruptcies, and cut its key interest rate to 0.25 percent from 0.75 percent. A few hours later, new finance minister Rishi Sunak announced a surge in public spending .
On Sunday, the BoE joined the US Federal Reserve and four other major central banks to make it easier for banks to access US dollar liquidity. Investors are watching for signs that the BoE will take further measures to help the world’s fifth-biggest economy before its next scheduled announcement on March 26, even though its room for manoeuvre has been reduced by last week’s action.
Economists say the BoE could trim rates to just above zero and expand its purchases of government bonds and corporate debt. Some have even raised the prospect of more radical policies such as “helicopter money”-giving newly created money directly to households-depending on the severity of the downturn. Bailey, who was accused by lawmakers of being slow to react to banking and fund management scandals in his old job as head of Britain’s Financial Conduct Authority, told parliament this month that he was nimble and dextrous enough to be BoE governor during times of global strife.
He pointed to his record during the financial crisis, when he spearheaded the BoE’s bank rescue packages. — Agencies