Federal Reserve System Interest rate Central bank Finance Fed cuts rate to zero launches more bond purchases in historic moves to fight coronavirus
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The Fed released most of its arsenal on Sunday to combat economic losses caused by the coronavirus, reducing short-term interest rates to zero, updating its crisis-time bond purchases to lower long-term interest rates, and encouraging more bank loans to households and businesses.
President Trump’s encouraging move is aimed at combating a US recession that may now occur.
Central bank policymakers agreed to reduce the Federal Reserve ’s benchmark federal funds rate by a full percentage point to zero to 0.25%, a level that hovered for years during and after the 2008 financial crisis.
The Fed said in a statement: “The outbreak of the coronavirus has damaged communities and disrupted economic activity in many countries, including the United States.” “The impact of the coronavirus will affect economic activity in the short term and constitute an economic outlook. risk.”
The Federal Reserve has already cut the main interest rates in half earlier this month. Many economists expect the Fed to agree to cut interest rates again at a two-day meeting ending on Wednesday, but the Fed has decided to take early action in a historic show of strength.
The central bank has also extended its bond purchase program, saying it will buy US $ 500 billion in US Treasuries and the US $ 200 billion in mortgage-backed securities to lower interest rates on mortgages and other consumer and corporate loans. The Fed said it would reinvest those gains instead of rolling them over.
During and after the financial crisis, the Federal Reserve purchased more than $ 3 trillion of such bonds to lower long-term interest rates. In recent years, as the economy has improved, the Fed has removed some of its assets from its balance sheet. With long-term interest rates at historically low levels, some economists have questioned the effectiveness of the new plan.
“The Fed is prepared to use all its tools to support credit flows to households and businesses, thereby promoting its maximum employment and price stability goals,” said the Fed.
“It’s good news, but it’s not enough on its own,” Ian Shepherdson, an economist at the Pantheon, said: It’s not just a package passed by the House on Friday evening to help Americans whose health and work have been affected by the outbreak.
“We think the Fed has now taken action to try to stay ahead of the terrible news of the virus spreading inside and outside the United States in the coming weeks,” Shepardson said.
The central bank has also taken several steps “to support the flow of credit to households and businesses.” It reduces the “discount window” rate, which is the short-term loan interest it charges banks. Down 1.5 percentage points to 0.25%.
It also encouraged banks to use their capital buffers of more than $ 4 trillion after the crisis to lend to households and businesses. These buffers are designed to prevent the recurrence of the financial crisis.
To further support lending, the Fed will require banks to hold reserves down to zero.
The Federal Reserve and central banks in Europe, the United Kingdom, Canada, Japan, and Switzerland also announced a coordinated effort to provide liquidity swaps to “relieve pressure on global capital markets.” If a foreign central bank suffers from severe economic and Financial pressure may make it difficult to lend to its financial institutions in the world’s reserve currency, the United States dollar. The central bank also used swaps during the financial crisis to ease this tension.
President Trump praised the Federal Reserve’s decision to cut interest rates, saying “this makes me very happy.”
“This is a big step, and I’m glad they did it,” Trump told his Coronavirus task force at a White House press conference.
Trump has been critical of the Federal Reserve and Chairman Jerome Powell, who was named chairman in 2017. Trump argues that rate hikes have slowed economic growth.
On Saturday, he again complained that the central bank did not take “active action” in the coronavirus pandemic and did not take enough steps to calm financial markets. “Our Fed is not doing what they should do,” he said.
But after Sunday’s decision to lower interest rates to zero, Trump’s criticism gave way.
“I think a lot of people on Wall Street are very happy,” he said. “I can tell you I’m happy. I didn’t expect that.”
At an alarming rate, the virus has become an imminent threat to an 11-year-old economic expansion. Many economists say a recession is inevitable and some believe the US is already in doldrums.
Initially, as businesses and consumers canceled meetings and travel, the outbreak slowed China’s speed in shipping parts and retail products from China and disrupted tourism. But across the country, a pandemic in just a few days made many Americans avoid crowds and public places, quickly smashing malls, restaurants, and restaurants.
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