(Mar 16): The Federal Reserve swept into action on Sunday in a fresh bid to save the US economy from the fallout of the coronavirus, cutting its benchmark interest rate by a full percentage point to near zero and promising to boost its bond holdings by at least US$700 billion ($990 billion).
The central bank also announced several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero percent. In addition, it united with five other central banks to ensure dollars are available around the world via swap lines.
Fed Chairman Jerome Powell held a conference call with reporters to discuss the actions during which he reiterated the central bank’s resistance to negative interest rates as some countries have used. The Fed’s key rate is now 0% to 0.25%, matching the record low it was last at in 2015.
President Donald Trump, who as recently as Saturday attacked the Fed for not lowering rates faster and further, quickly expressed support for the move.
“It makes me very happy and I want to congratulate the Federal Reserve,” he said. “That’s a big step and I’m very happy they did it.”
US stock futures tumbled steeply after the announcement, as investors worried that emergency measures by the Fed would fall short in countering the virus’s damage to the economy. Treasury futures surged in early Asia trading, giving rise to expectations that parts of the US yield curve could soon turn negative.
Powell told reporters on the call that the rate decision Sunday is in lieu of the Fed’s regularly scheduled meeting this week, planned for Tuesday and Wednesday.
Big Guns
The action comes as the US economy faces sharply curtailed activity in everything from basketball games, to dining out and travel. That’s likely to hurt revenue for thousands of companies and put many jobs as risk, if not cause outright layoffs.
With Sunday’s announcement, the Fed is firing some of the biggest guns in its arsenal, but economists say without a similar, forceful response from the government, the country’s record 11 year expansion could end in recession. Stocks have already tumbled into a bear market.
“The Fed cannot combat a public health crisis, but they can provide a helpful hand when the crisis abates,” said Neil Dutta, head of US economic research at Renaissance Macro Research LLC.
The Fed said it will keep interest rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
The central bank acted the day before leaders from the Group of Seven nations, including Trump, are set to discuss their virus response on a teleconference. Central bankers and investors have pressed governments to do more to support their economies given monetary ammunition is running low and because fiscal policy can be targeted at corners of an economy that need it most.
Global Easing in 2020
“The Federal Reserve 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 said.
To support smooth functioning in the Treasury and mortgage backed securities market, the Fed said it would lift its holdings of Treasury securities by at least US$500 billion and of MBS by at least US$200 billion.
Cleveland Fed President Loretta Mester cast a lone dissent, preferring rates were instead cut to a 0.5%-0.75% range.
“The fact that the Fed saw it as necessary to act with the meeting just three days away speaks to the urgency of the matter. The broad-spectrum of tools engaged shows the Fed is contending with more than just an economic shock,” says Bloomberg analyst Carl Riccadonna.
The Fed’s actions followed the Trump administration and Congress’s first comprehensive steps Friday to assure the public that it has a coordinated public health and fiscal policy response – in what could serve as a one-two punch that shores up investor confidence and helps stem a weeks-long meltdown in markets.
The dramatic Sunday evening moves follow aggressive action by the Fed on Thursday to ease strains in the Treasury debt market through massive injections of liquidity and broader purchases of US securities in a measure reminiscent of the quantitative easing it used during the financial crisis.
The Fed’s action also comes less than two weeks after it slashed rates by a half percentage point in an emergency move that failed to reassure nervous investors, in part because it was not accompanied by steps from other policy makers. That move – alone – failed to comfort investors and stocks ended the day down almost 3%.
“The Fed’s mantra has been to go early and aggressive, so this is the best thing they could have done, they’re really inventing new stuff,” said Diane Swonk, chief economist at Grant Thornton in Chicago.
She also emphasized that more action is needed from fiscal authorities.
“This is not enough,” she said. “The Fed is showing its commitment a lot more than the federal government is. They’re going to have to step it up a lot more.”
