The U.S. federal reserve abruptly cut interest rates to nearly zero on Sunday afternoon and launched a massive $700 billion quantitative easing program to deal with the impact of a new coronavirus on the U.S. economy. This follows the fed’s emergency half-point interest rate cut in the past two weeks and the expansion of overnight credit refinancing in the financial system to $1,500bn. In the wake of the fed’s emergency decision to cut interest rates, the market was volatile, with the dollar index falling more than 100 points in the short run, while spot gold jumped more than $30 to break through the $1,570 level before falling back below $1,550. Dow Jones index futures fell more than 1,000 points, triggering trading restrictions. In addition, the price of WTI crude fell more than 10 percent.
The federal reserve made the biggest move in the history
The fed cut its target range for the federal funds rate from 1% to 1.25% to 0% to 0.25%. The federal funds rate is both the benchmark rate for short-term loans to financial institutions and the rate linked to many consumer interest rates. “The coronavirus outbreak has damaged communities and disrupted economic activity in many countries, including the United States,” the fed said.
In the face of highly volatile financial markets, the fed also cut the emergency lending rate at the Banks’ discount window by 125 basis points to 0.25 percent and extended loan maturities to 90 days.
The fed also cut the reserve requirement ratio for thousands of Banks to zero. Moreover, in a coordinated global action by the central bank, the fed said that the bank of Canada, the Bank of England, the bank of Japan, the European central bank, the federal reserve and the Swiss national bank had acted to increase dollar liquidity globally through existing dollar swap facilities. The central bank lowered the interest rate on those swaps and extended the maturity of those loans.
The fed cut rates from its previous target range of 1 percent to 1.25 percent and said it would keep them there “until it is confident that the us economy has withstood recent events and is on track to achieve its maximum employment and price stability targets”. Cleveland fed President Janet Meester was the sole dissenter, preferring to set rates between 0.5 percent and 0.75 percent, which would mean a 50 basis point or 0.5 percentage point cut.
In response to the stock market rout, the federal reserve cut interest rates by an emergency 50 basis points on March 3, an unusually intense rate cut. After the 2008 financial crisis, the federal reserve cut interest rates all the way to the ultra-low level of 0-0.25% to save the economy and then continued its zero interest rate policy for seven years.
The federal reserve statement said the new outbreak has caused social and economic damage in many countries, including the United States. The global financial environment has been significantly affected. The rate cut will help support the us economy, stabilise the job market and maintain the inflation target.
In conjunction with the rate cut, the fed also announced a massive $700 billion program of quantitative easing, which included buying back at least $500 billion in Treasury bonds within months and adding at least $200 billion in mortgage-backed securities. It is also unusual. After the 2008 financial crisis, the fed launched at least three rounds of quantitative easing.
The fed is prepared to use its tools to support the flow of credit to households and businesses, adding $500 billion in Treasury bonds and $200 billion in agency-backed mortgage securities in the coming months and buying $40 billion in installments starting Monday, the statement said.
The fed’s action should be the biggest one-day move the bank has ever made, and in many ways reflects its efforts during the financial crisis, which it rolled out within months. Sunday’s move included a number of plans, interest rate cuts and quantitative easing, all in one day.
At a news conference after the federal reserve made another emergency interest rate cut, fed chairman colin Powell said the us economy was still strong, but the global spread of the new pneumonia epidemic put economic growth at risk, so timely action was needed to support economic stability and growth.
Powell said the new coronavirus posed a series of major challenges to the economy, that weak performance abroad would weigh on U.S. exports for some time, that the new coronavirus outbreak could weigh on inflation this year and that economic performance in the second quarter could be weak. There are signs of stress in some parts of the financial markets, and the bond purchases could create a looser environment.
Mr. Powell said today’s decision would support the us economy and could boost markets and return them to normal. We will continue to monitor the situation.
Mr. Powell also said the federal open market committee would not hold a planned meeting this week.
US President Donald Trump has welcomed the federal reserve’s move to cut interest rates after it cut rates.
“It makes me very happy,” Trump said at a news conference on the coronavirus at the White House on Sunday night. “I want to congratulate the fed, they did it in one step, and I think people in the market should be very excited.”
Financial markets reacted sharply
Financial markets do not seem to be buying the fed’s biggest move in history. U.S. stock futures continued to fall, with dow Jones index futures down more than 1,000 points, the 5 percent limit, triggering a decline.
While the fed’s action may help ease the functioning of the market, many investors say they ultimately want to see the U.S. coronavirus cases peak and decline before they can safely take risks and buy stocks again.
“The fed is definitely firing a monetary bazooka,” said Peter Boockvar, chief investment officer at Bleakley consulting group. It works better because I don’t know what they have left, and no amount of money from the sky can cure the virus. Only time and medicine will do.”
“This move, together with an important fiscal stimulus package, should help mitigate the downward pressure on the economy from the virus’s impact on economic activity,” said Quincy Krosby, chief market strategist at Prudential Financial. It will be positive, but the market is at the mercy of the virus and at the mercy of whether containment works.”
The dollar index fell more than 100 points to 97.63 after the fed cut rates.
Spot gold jumped short, rising more than $30 to break through the $1,570 mark and hit a high of $1,575.10 an ounce.
But gold soon fell sharply and briefly fell below $1,550 an ounce.