The US Federal Reserve has taken emergency action to help the economy withstand the coronavirus by slashing its benchmark interest rate to near zero and saying it would buy $700 billion in Treasury and mortgage bonds.
The Fed’s surprise announcement signalled its concern that the viral outbreak will depress economic growth in the coming months and that it’s prepared to do whatever it can counter the risks. It said it would keep its key rate at a range between zero and 0.25 per cent until it feels confident that the economy can survive what’s become a sudden near-shutdown of economic activity in the United States.
President Donald Trump congratulated the central bank for the action, and said the decision was “good news” and “makes me very happy” .
The central bank will buy $500 billion of Treasury securities and $200 billion of mortgage-backed securities – an effort to smooth over market disruptions that have made it hard for banks and large investors to sell Treasuries as well as to keep longer-term rates borrowing rates down. The disruptions in the Treasury market sent the yield on the 10-year Treasury rising last week, an unusual move that threatens to push borrowing costs for mortgages and credit cards higher.
By aggressively slashing its benchmark short-term rate to near zero and pumping hundreds of billions of dollars into the financial system, the Fed’s moves recalled the emergency action it took at the height of the financial crisis.
Some of the Fed’s new steps are intended to free up money for banks to lend. As businesses across the country see their revenues dwindle as consumers stay home, they will seek short-term loans to maintain their payrolls. The Fed said it has dropped its normal requirement that banks hold cash equal to 10 per cent of its customers’ deposits, allowing banks to lend those funds. It also said banks can use additional cash buffers that were imposed after the 2008 financial crisis for lending.
“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” the central bank said.
The Fed also announced that it has cut interest rates on dollar loans in a joint action that it has taken with five central banks overseas. That is intended to ensure that foreign banks continue to have access to dollars that they lend to overseas companies.
All told, the Fed’s actions amount to a recognition that the US economy faces its most perilous juncture since the recession ended more than a decade ago.