The Fed slashes rates to near zero to combat coronavirus

Andrew Cummings
March 17, 2020

The swap lines are standing facilities that serve as a liquidity backstop, and can help counter the effect of both domestic and global supply line strains as the coronavirus is expected to spread, the Fed said. "If its actions work, it will prevent thousands of businesses, large and small, from failing". chief financial analyst Greg McBride said the Fed is "dusting off the financial crisis playbook, returning to bond buying, coordinating with other global central banks to provide access to USA dollar liquidity, cutting interest rates to zero and opening the Fed's discount window to ensure the flow of credit through banks to consumers and businesses".

The Fed reduced its Federal Funds Rate to near zero for the first time since the Great Recession of 2008.

Mortgage rates, which are influenced indirectly by the Fed and investors' expectations for the economy, have fallen to record lows with the Fed's rate cuts.

Federal Reserve Chairman Jerome Powell is scheduled to hold a press conference at 6:30pm Eastern Time. "I want to congratulate the Federal Reserve, for starters they've lowered the fed rate from what it was, which was 1 to 1.25".

The Fed's actions followed other steps by financial regulatory agencies and central banks to stave off further economic fallout from a worsening crisis.

Donald Trump congratulated the Fed's moves and called them "terrific" and "very good news". The central bank said in its statement that the outbreak will affect economic activity in the near term and pose risks to economic expectations. Those purchases are meant to smooth the functioning of the Treasury bond market and mortgage lending and to keep long-term borrowing rates down. The Fed also announced that it had reduced interest rates on loans in dollars in a joint measure it had taken with five central banks overseas. Last week, banks and other large investors were unable to sell all the 10-year Treasuries they wanted to unload - pressure that inflated rates in that market.

"They can't allow funding problems and liquidity to seize up in credit markets, which can turn into a financial crisis if left unchecked", said George Boubouras, head of research at K2 Asset Management. New Zealand's two-year yield sank by 27 basis points after the central bank slashed its rates by 75 basis points in an emergency move.

It also featured indications of severely impaired market liquidity including wide bid-offer spreads for all but the newest Treasuries, and broken relationships between cash bonds and the futures contracts that reference them. This move addresses complaints from many banks that regulatory limits were inhibiting their ability to lend when credit is in high demand.

The call to slash the rate in the United States is meant to make borrowing as cheap and accessible as possible for households and businesses in order to stimulate economic activity despite the oppressive impact the spread of COVID-19 is having on domestic and global markets.

South Korea stepped in as well, with a 50 basis point rate cut in a rare inter-meeting review yesterday. It also said banks could borrow for 90 days.

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