US Federal Reserve slashes rates to 0 to combat virus fallout

The Federal Reserve, also commonly known as the Fed, took the extraordinary step on Sunday of slashing its benchmark interest rate to near zero and unleashed a slew of measures to unfreeze credit markets- as the United States central bank harnesses the considerable firepower of its crisis playbook to defend the US and global economies against an onslaught of coronavirus pandemic disruptions. 

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed’s policy-setting committee said in a statement on Sunday. “Global financial conditions have also been significantly affected.”

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Moving sooner than many had expected, the Fed slashed the target range for its benchmark federal funds rate by a full percentage point to 0 – 0.25 percent. The Fed also announced that it is restarting its bond-buying programme with enormous purchases of at least $500bn of US Treasury securities and $200bn of mortgage-backed securities in the coming months. 

During a conference call with reporters, Federal Reserve Chairman Jerome Powell said that the US treasury and mortgage-backed security markets are how monetary policy decisions “flow through to borrowers in the real economy,” noting that when these markets are not functioning well, it can spread to other markets where households and businesses typically get credit.

These markets had started to seize up in recent weeks as businesses scramble to get their hands on sufficient cash to weather a crisis that is proving increasingly difficult to predict. 

US President Donald Trump – normally a fierce critic of the Fed – applauded Sunday’s rate cut, telling reporters: “It makes me very happy and I want to congratulate the Federal Reserve.”

Markets, however, did not react well to the news, with US equity futures falling sharply as investors fretted that the measures would not be enough to offset the economic damage wrought by the outbreak. 

The Fed had already dropped a surprise interest rate cut less than two weeks ago, but it failed to calm nerves as businesses, investors, policymakers, and Americans, in general, try to get to grips with how the pandemic could rampage through the US and global economies.  

Policymakers had been scheduled to meet on Tuesday and Wednesday, which made Sunday’s announcement all the more unnerving for markets.

“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,” said Bloomberg economist Carl Riccadonna. 

High levels of uncertainty have fostered record selloffs and rebounds in US stocks.

The litany of disruptions to the US and global economies are unfolding at a breakneck pace. International travel has been disrupted. Conferences, sporting and entertainment events have been cancelled. Schools and universities are closing. Firms are asking people who can work remotely to stay home. Thousands of businesses are bracing for lost revenues, placing jobs and livelihoods at risk.  Panic-buying is stripping store shelves bare.  

In addition to the interest rate cut and bond-buying, the Fed rolled out other measures on Sunday including cutting reserve requirements for many banks to zero and letting banks borrow at the Fed’s discount window for up to 90 days – moves designed to help banks more easily meet demands for credit from households and businesses. 

The Fed along with five other central banks also moved to ensure dollars keep moving smoothly through the global financial system by reducing pricing on dollar swap lines. These measures are designed to ensure that the markets for borrowing and lending US dollars overseas do not become strained, which can feed back into the US economy.  The coordinated action involved the Fed, the Bank of Canada, European Central Bank, Bank of England, Bank of Japan and Swiss National Bank.