The Federal Reserve took emergency action Sunday and slashed its benchmark interest rate by a full percentage point to nearly zero and announced it would purchase $700 billion in Treasury and mortgage-backed securities to encourage lending to try to offset the impact of the novel coronavirus outbreak.
The U.S. central bank said the effects of the outbreak will weigh on economic activity in the near term and pose risks to the economic outlook. The Fed also said it will keep rates at nearly zero until it feels confident the economy has weathered recent events.The Fed also said that it was working with central banks around the world, including the European Central Bank, the Bank of Canada, the Bank of Japan and others, in a coordinated effort to make it easier for the world’s banks and financial services firms to trade currencies and get U.S. dollars.
The Sunday rate cut is one of the most drastic steps the central bank has taken since the depths of the 2008 financial crisis. It is an effort to loosen up the country’s monetary supply and stimulate lending to try to counter the coronavirus’ growing damage to the U.S. economy and the globe’s financial markets.The Fed was expected to take action at its scheduled meeting Wednesday. The fact that the Fed moved earlier than many observers thought, making its second emergency cut in less than a month, signals policy makers’ level of concern.
Coronavirus triggered the Fed’s largest cut in interest rates since 2008
“It makes me very happy,” President Donald Trump said Sunday evening from a press conference on the coronavirus at the White House. “I want to congratulate the Federal Reserve…They did it in one step… I think that people in the markets should be very thrilled.”Markets seemed less than thrilled, however. U.S. stock futures fell more than 4% Sunday evening after the Fed’s rate announcement. “The Fed’s latest move does not change our expectation that the economy will slow dramatically in the near term,” Rubeela Farooqi, chief U.S. economist with High Frequency Economics, told investors in a report.With the virus’ spread causing a broad shutdown of economic activity in the United States, the Fed faces a daunting task. Its tools — intended to ease borrowing rates, facilitate lending and boost business and consumer confidence — aren’t ideally suited to offset a fear-driven halt in spending and traveling.”We have been urging this action for some time and we’re very happy that the Fed did not wait until Wednesday’s meeting,” said economist Ian Shepherdson, chief economist of Pantheon Macroeconomics. “In one line: Great news, but not enough on its own.”
Shepherdson said Congress and the White House may need to consider “at least” $1 trillion in emergency spending to help support small and mid-sized businesses, the self-employed and millions of households under varying levels of quarantine facing the prospects of months of little to no business or income. This could include financial help for the nation’s travel and hospitality industries, which have seen unusual plunges in business in barely two weeks. The Fed’s actions may amount to a recognition that the U.S. economy faces its most perilous juncture since the recession ended more than a decade ago.”I think the Fed has to bring the big guns,” said Gennadiy Goldberg, senior U.S. rates strategist for TD Securities.Separately, Treasury Secretary Steven Mnuchin said earlier Sunday that both the central bank and the federal government have tools at their disposal to support the economy.