Central bank intervenes to boost economy amid dropping markets
WASHINGTON — With the fastspreading coronavirus posing a dire threat to economic growth, the Federal Reserve on Sunday night took the dramatic step of slashing interest rates to near-zero and unveiled a sweeping set of programs in an effort backstop the U.S. economy.
In addition to cutting its benchmark interest rate by a full percentage point, returning it to a range of 0 percent to 0.25 percent, the Fed said it would inject huge sums into the economy by snapping up at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed debt “over coming months.”
The remarkable Sunday afternoon action — a drastic move unlike any since the depths of the global financial crisis a dozen years ago — reflected the imminent peril facing the global economy as the virus shutters factories, quarantines workers and disrupts everyday life.
President Donald Trump, who has been vocal in his criticism of the Fed, praised the central bank’s
move and sought to assure worried Americans that food supplies would not be disrupted. After weeks of problems, the administration promised again to expand access to testing for the virus, but a top official added, “I’m not going to say that the lab testing issue is over.”
The virus is wreaking havoc across the world, with Italy reporting 368 new deaths, bringing the toll there to 1,809 on Sunday — the largest one-day uptick yet of any country and, some experts warned, a harbinger of the threat to the United States if the government does
not take swift action.
In the United States, more than 3,700 cases of the virus have now been reported across 49 states as of Sunday, and public officials scrambled to enact stricter measures to slow the virus’s spread, including the shuttering of schools, restaurants, bars and other businesses.
With economic activity in the United States coming to a virtual standstill and a recession looking increasingly likely, the Fed has become America’s first line of economic defense.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the central bank said in a statement.
“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.”
Chairman Jerome Powell and his Fed colleagues are trying to prevent the near-term disruptions caused by allowing businesses to default on loans or close permanently, which could inflict long-term damage that could take years to shake off. They are also working to make sure that the inner workings of financial markets function smoothly at a time of intense volatility.
“The virus presents significant economic challenges,” Powell said in a news conference Sunday evening. In the past week, he said, “several important financial markets”
have “shown signs of stress,” pointing specifically to the Treasury market.
The Fed’s bond purchases are squarely aimed at keeping the market for government debt, which forms the backbone of the broader financial system, functioning smoothly.
The Fed’s move comes on the heels of a House bill, passed early Saturday morning, that aims to provide free testing for the coronavirus and sick pay for some workers.
The measure, which the Senate is expected to take up Monday, is just the first in what lawmakers have said will be a series of relief legislation.
On Sunday, Powell reiterated
that Congress had a large role to play in combating the economic impact. “Typically fiscal policy does play a major role when there are downturns,” he said. “That will probably need to be the case here as well.”
But markets were unimpressed, concerned instead about growing evidence that the coronavirus will amount to far more than a blip. Stock futures plummeted Sunday evening, and a key Japanese equity index opened lower.
In addition to buying bonds and cutting rates, the Fed also took steps to ensure that banks are able to continue lending and that credit markets don’t seize up the way they did in 2008.