The Federal Reserve took emergency action on 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 concern that the viral outbreak will depress economic growth in the coming months and that it’s prepared to do whatever it can counter the risks. It said it would keep its key rate at a range between zero and 0.25 percent until it feels confident that the economy can survive what’s become a sudden near-shutdown of economic activity in the United States.
The central bank will buy $500 billion of Treasury securities and $200 billion of mortgage-backed securities — an effort to smooth over market disruptions that have made it hard for banks and large investors to sell Treasuries as well as to keep longer-term rates borrowing rates down. The disruptions in the Treasury market sent the yield on the 10-year Treasury rising last week, an unusual move that threatens to push borrowing costs for mortgages and credit cards higher.
By aggressively slashing its benchmark short-term rate to near zero and pumping hundreds of billions of dollars into the financial system, the Fed’s moves Sunday recalled the emergency action it took at the height of the financial crisis.
Fed's interest rate policy
Starting in 2008, the Fed cut its key rate to near zero and kept it there for seven years. The central bank has now returned that rate _ which influences many consumer and business loans – to its record-low level.
Some of the Fed's new steps are intended to free up money for banks to lend. As businesses across the country see their revenues dwindle as consumers stay home, they will seek short-term loans to maintain their payrolls.
The Fed said it has dropped its normal requirement that banks hold cash equal to 10 percent of its customers' deposits, allowing banks to lend those funds. It also said banks can use additional cash buffers that were imposed after the 2008 financial crisis for lending.
“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,” the central bank said.
“It confirms that the Fed sees the economy going down ... very sharply’’ toward recession, Adam Posen, president of the Peterson Institute for International Economics, said.
The Fed also announced that it has cut interest rates on dollar loans in a joint action that it has taken with five central banks overseas. That is intended to ensure that foreign banks continue to have access to dollars that they lend to overseas companies.
All told, the Fed's actions amount to a recognition that the US economy faces its most perilous juncture since the recession ended more than a decade ago.
Still, with the virus' spread causing a broad shutdown of economic activity in the United States, the Fed faces a daunting task.
Trump congratulates Fed
US President Donald Trump said the Federal Reserve's decision on Sunday to cut interest rates was "good news" and "makes me very happy" as he congratulated the central bank for taking further action aimed at helping shore up the US economy amid the global coronavirus pandemic.
"It's really good news. It's great for the country," Trump, who had publicly pressed the Fed to slash rates to boost the economy during the fast-escalating coronavirus outbreak, told a White House news conference.
In a statement, the central bank said it was lowering rates to a target range of 0 percent to 0.25 percent.
Trump also urged Americans, who have cleared store shelves of some basic essentials in recent days, to "buy a little bit less."
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