Fed Slashes Interest Rates to Near-Zero, Buys Bonds to Buffer Economy in Coronavirus Outbreak

White House

The U.S. Federal Reserve announced Sunday evening that it would slash interest rates to near-zero and buy billions of dollars in bonds in an effort to protect the U.S. economy from the ongoing effects of the coronavirus outbreak.

The rate cut of 100 basis points (1%) follows a cut two weeks ago by 50 basis points (0.5%). The rate will now be within a target range of 0% to 0.25%.

In a statement, the Fed said:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.

In a separate statement, the Fed said (emphasis added):

Federal Reserve lending to depository institutions (the “discount window”) plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy. By providing ready access to funding, the discount window helps depository institutions manage their liquidity risks efficiently and avoid actions that have negative consequences for their customers, such as withdrawing credit during times of market stress. Thus, the discount window supports the smooth flow of credit to households and businesses. Providing liquidity in this way is one of the original purposes of the Federal Reserve System and other central banks around the world.

The Federal Reserve encourages depository institutions to turn to the discount window to help meet demands for credit from households and businesses at this time. In support of this goal, the Board today announced that it will lower the primary credit rate by 150 basis points to 0.25 percent, effective March 16, 2020. This reduction in the primary credit rate reflects both the 100 basis point reduction in the target range for the federal funds rate and a 50 basis point narrowing in the primary credit rate relative to the top of the target range. Narrowing the spread of the primary credit rate relative to the general level of overnight interest rates should help encourage more active use of the window by depository institutions to meet unexpected funding needs. To further enhance the role of the discount window as a tool for banks in addressing potential funding pressures, the Board also today announced that depository institutions may borrow from the discount window for periods as long as 90 days, prepayable and renewable by the borrower on a daily basis. The Federal Reserve continues to accept the same broad range of collateral for discount window loans.

The Federal Reserve is encouraging banks to use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus.

President Donald Trump has been urging the Fed to cut rates since well before the coronavirus outbreak, arguing that it had raised them too quickly during the economic recovery.

The Fed also slashed banks’ reserve requirements to zero to support lending to businesses and households affected by the outbreak. It also bought hundreds of billions of dollars in government bonds and mortgage-backed securities.

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