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16 March 2020

Fed cuts main interest rate to near zero, vows bond-buying programme

The Fed’s key rate is now zero to 0.25 per cent, matching the record low level it hit during the 2008 financial crisis and where it was held until December 2015

Jerome Powell, the Chairman of the US Federal Reserve

by Bloomberg

The US Federal Reserve has slashed its benchmark interest rate by a full percentage point to near zero and promised to boost its bond holdings by at least $700 billion as the regulator moves to save the US economy from the fallout of the coronavirus.

Jerome Powell, US Federal Reserve Chairman, said that the disruption to lives and businesses meant Q2 2020 US growth would probably be weak and it was hard to know how long the effects would last, leaving a clear role for fiscal policy to help cushion the blow.

“We do know that the virus will run its course and that the US economy will resume a normal level of activity. In the meantime, the Fed will continue to use our tools to support the flow of credit,” said Powell.

 “The thing that fiscal policy and only fiscal policy can do, is reaching out directly to affected industries, affected workers, and we’ve seen some of that so that is an important job,” added Powell.

The central bank also announced several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero per cent.

In addition, the Fed united with five other central banks to ensure dollars are available around the world via swap lines. Powell said that he did not think negative rates, which have been used in Europe and Japan, would be appropriate policy in the US.

President Donald Trump, who as recently as attacked the Fed for not lowering rates faster and further, quickly expressed support for the move.

The Fed’s emergency action came as more and more evidence emerged that the US economy is being hit hard by the virus. Businesses across the US are instructing staff to work from home, and travel and entertainment are being particularly affected as people take steps to observe social distancing to avoid infection.

As the fallout spreads across the economy, the risk of a recession is mounting. Goldman Sachs slashed its GDP forecasts, the lender is now predicting zero growth in the first quarter and a five per cent contraction in the second.

RELATED STORIES: US Federal Reserve Jerome Powell President Donald Trump coronavirus





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