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Fed cuts interest rate to near zero to support markets

The rate slash was among a series of efforts the Federal Reserve announced to ease economic fears amid the COVID-19 pandemic.

Sunday’s interest rate cut was the second by the Federal Reserve in less than two weeks.
Sunday’s interest rate cut was the second by the Federal Reserve in less than two weeks. (Caroline Brehman/CQ Roll Call file photo)

The Federal Reserve on Sunday said it would cut its key interest rate nearly to zero, buy hundreds of billions of dollars in bonds to provide more liquidity to the financial market, ease reserve requirements on banks, and lower the cost of borrowing from the central bank in a series of efforts to ward off the economic dangers of the COVID-19 pandemic. 

The announcements, which came as Asian markets prepared to open Monday, are an indication of the Fed’s worry about the economy as COVID-19, the disease caused by the coronavirus, leads to widespread disruption. The Fed had previously cut its benchmark federal funds rate by half a percentage point less than two weeks ago. Both rate moves came outside of a scheduled Fed monetary policy meeting. The next scheduled one is Tuesday and Wednesday.

The Fed’s actions, which were partly coordinated with other central banks, also follow Treasury Secretary Steven Mnuchin’s comment Friday on CNBC that he would be asking Congress to give the central bank authorities taken away by the 2010 Dodd-Frank financial overhaul that followed the 2008 financial crisis and subsequent recession. “We’ll be going back to Congress for authorities that they took away that we think we need,” Mnuchin said. 

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He reiterated that point in interviews on Sunday, but wasn’t more specific.

But Fed Chairman Jerome Powell told reporters on a call Sunday that the central bank wasn’t looking for additional authority to buy assets. 

“We don’t have the legal authority to buy those we don’t already buy and we’re not seeking authority to do so. We haven’t discussed that at the FSOC and it’s not authority we’re seeking,” Powell said. FSOC is the Financial Stability Oversight Council, a body established by Dodd-Frank to monitor risks to the financial system.

COVID-19 has led to numerous cancellations of public events, closed schools, remote work policies in many companies and travel restrictions between the U.S. and Europe and Asia. 

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected,” the Fed said in its Federal Open Market Committee statement that explained it would lower the federal funds target to between 0 and 0.25 percent. “The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook.”

President Donald Trump welcomed the Fed’s move. Trump has frequently criticized Powell for failing to drop rates sooner and noted in a news conference recently that he has the authority to fire Powell, an assertion that is in dispute. 

In three statements Sunday, the Fed also said it would take the following steps: 

  • Increase its holdings of Treasury securities by at least $500 billion and of agency mortgage-backed securities by at least $200 billion. 
  • Reinvest principal payments from the Fed’s holdings of agency debt and agency mortgage-backed securities. 
  • Encourage deposit-taking banks to turn to the Fed’s discount window to help manage their liquidity risk and continue lending.
  • Lower the primary credit rate by 1.5 percentage points, to 0.25 percent, effective Monday, a move designed to encourage banks to turn to the discount window. 
  • Allow banks to borrow from the discount window for as long as 90 days. 
  • Urge banks to use their capital and liquidity buffers to lend to households and businesses affected by the coronavirus. It noted that the bank holding companies have built up “substantial levels of capital and liquidity” since the 2007-2008 crisis. 
  • Reduce reserve requirement ratios to zero percent, effective March 26, when the next reserve maintenance period begins. “This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses,” it said. 
  • Lower the pricing on standing U.S. dollar liquidity swap line arrangements by a quarter of a percentage point and offer dollars weekly with an 84-day maturity, in addition to one-week maturities now offered. The changes will take effect this week and were coordinated with central banks of Canada, England, Japan, the European Union and Switzerland.

The swap lines are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad.

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