Fed cuts interest rates to near zero in emergency coronavirus intervention
The Federal Reserve on Sunday cut its benchmark interest rate to almost zero and launched a $700 billion quantitative easing program in response to the expected economic downturn and stock market slump caused by the coronavirus.
Why it matters: This is the most drastic measure the Fed could take to try to shield the economy amid a global pandemic. The central bank hasn’t made moves this dramatic since the financial crisis.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. ... The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.”— Fed statement
Details: The target range for the federal funds rate is now 0%–0.25%. That's 1 percentage point, or 100 basis points, lower than it was going into the weekend.
- The interest rate at the discount window — the rate at which banks borrow money directly from the Fed — has been slashed by 150 basis points to just 0.25%. The intention is "to help meet demands for credit from households and businesses," per a Fed statement.
- Banks are being encouraged to lend out their capital rather than hold onto it for regulatory reasons. There is now no reserve requirement for banks.
- America's largest banks agreed not to spend any capital buying back their shares, at least until the end of June.
- International capital flows are also being buttressed with coordinated action between the Fed and the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.
The backdrop: The emergency rate cut — the second since anxiety about the coronavirus took hold of the stock market and the economy — comes a few days before the Fed’s scheduled policy meeting on Wednesday.
- Importantly, the move came just before Monday morning trading begins in Asian markets. The U.S. stock futures tumbled so sharply after the Fed's announcement that they hit "limit down," which prevents futures from trading 5% below Friday's closing price.
- The decision was not unanimous. Loretta Mester, president of the Cleveland Fed, voted for a smaller 50bp cut.
Between the lines: At a press conference Sunday night via telephone, Fed chairman Jerome Powell said there's "plenty of power left in [the Fed's] tools" — despite the central bank cutting rates to near zero — should the coronavirus crisis get worse.
- "We do not see negative policy rates as likely to be appropriate policy response here in the U.S.," Powell said. President Trump has previously called on the Fed, an apolitical institution, to consider negative interest rates.
- Powell said the Fed was not "actively considering" requesting permission from Congress for more expansive measures.
The bottom line: Powell said the Fed has used its tools "quite aggressively," but that action from Congress to soften the pandemic's blow to the economy is critical.
- "It's very hard to say how big the effects will be" on the economy, Powell said. "That's going to depend on how widely the virus spreads, which is something highly uncertain and I would say unknowable."