Mar 16, 2020 - Economy & Business

Why the Fed action matters

Illustration of a hundred dollar bill with Benjamin Franklin wearing a face mask

Illustration: Sarah Grillo/Axios

The Federal Reserve, in conjunction with central banks around the world, took drastic action on Sunday night — the kind of action not seen since the global financial crisis — to try to prevent the novel coronavirus from devastating the economy.

What they did: The Fed slashed interest rates to near zero Sunday night, announced a $700 billion bond-buying program, and relaxed bank capital regulations to encourage further lending.

Why it matters: Thousands of businesses and millions of households are about to suffer extreme economic hardship. Employers and employees in the travel, entertainment, sports, hospitality, retail, and many other industries are going to see losses and layoffs for as long as COVID-19 is raging.

  • Once the pandemic is over, all of those businesses can and should come roaring back. In order to do so, they will require new loans to help them get through the bad times, as well as money to refinance existing debts as they come due.
  • Monetary policy can't fight the coronavirus directly. But it can help ease the economic pain that the virus causes.

The bottom line: The Fed is using every weapon in its arsenal to encourage banks to lend money freely at the lowest possible interest rates. If its actions work, it will prevent thousands of businesses, large and small, from failing.

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