The Fed’s surprise move to cut interest rates a full percentage point and buy $700 billion in Treasury and mortgage bonds signals that it will do all it can to counter the risk of the coronavirus outbreak causing a recession.
Federal Reserve Chair Jerome Powell pauses during a news conference, Tuesday, March 3, 2020, while discussing an announcement from the Federal Open Market Committee, in Washington. In a surprise move, the Federal Reserve cut its benchmark interest rate by a sizable half-percentage point in an effort to support the economy in the face of the spreading coronavirus. Chairman Jerome Powell noted that the coronavirus "poses evolving risks to economic activity.
The Fed will buy at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. This amounts to an effort to ease market disruptions that have made it harder for banks and large investors to sell Treasuries as well as to keep longer-term rates borrowing rates down.
“Ultimately, the virus will run its course and the U.S. economy will resume a normal level of activity,” Powell said, though he didn’t speculate on when the rebound might occur. “We don’t have the tools to reach individuals and particularly small businesses,” he said on the conference call. “But this is a multi-faceted problem, and it requires answers from different parts of the government and society.”
Powell said the Fed acted Sunday after having decided to meet this weekend in lieu of the meeting its policy committee had been scheduled to hold Tuesday and Wednesday this week. He also said the central bank decided not to issue its usual quarterly projections for the economy and interest rates this week because the virus is altering the economic picture too quickly to make such projections useful.
By slashing its benchmark short-term rate and pumping hundreds of billions of dollars into the financial system, the Fed’s moves Sunday recalled the emergency action it took at the height of the financial crisis. Starting in 2008, the Fed cut its key rate to near zero and kept it there for seven years. The central bank has now returned that rate — which influences many consumer and business loans — to its record-low level.
As more businesses across the country see their revenue dwindle as consumers stay home, many of them 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% of its customers’ deposits, thereby allowing banks to lend that money instead. It also said banks can use additional cash buffers that were imposed after the 2008 financial crisis for lending.
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