Updated Mar 15, 2020 - Economy & Business

Fed cuts interest rates to near zero in emergency coronavirus intervention

Photo: Mark Makela/Getty Images

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."

Go deeper

Fed cuts interest rate in response to coronavirus

Sarah Silbiger/Getty Images

The Federal Reserve unanimously decided to cut interest rates by half-a-percentage point — a large amount — in an emergency response to the spread of coronavirus and its impact on the economy.

Why it matters: The last time the Fed announced an interest rate cut outside a regularly scheduled meeting was in the midst of the financial crisis. The rare move shows the Fed's effort to stem any impact the coronavirus poses to the record-long economic recovery.

Fed says it will help business-funding market amid coronavirus outbreak

Jerome Powell. Photo: Mark Makela/Getty Images

The Federal Reserve said Tuesday it would intervene in a key market used by cash-strapped businesses for the first time since the financial crisis — a move intended to help corporations hurt by the coronavirus outbreak.

Why it matters: This market froze up in recent weeks, limiting businesses' ability to borrow at a time when the halt in economic activity is weighing on American corporations. It's the latest in a series of moves by the Fed to step in and ease that pain.

Go deeperArrowUpdated Mar 18, 2020 - Economy & Business

The Fed's $1.5 trillion injection may be just the beginning

Data: Investing.com; Chart: Axios Visuals

The Fed's actions on Thursday appear to have had a significant impact on the bond market and the currency market, where the dollar has reversed its slide against most major currencies after touching monthslong lows earlier this week.

The state of play: The dollar index, which measures the greenback's value against six global peers like the euro and Japanese yen, rose 1% Thursday.