The Federal Reserve took emergency action Sunday and slashed its benchmark interest rate by a full percentage point to nearly zero and announced it would purchase more Treasury securities to encourage lending to try to offset the impact of the coronavirus outbreak.
The central bank said the effects of the outbreak will weigh on economic activity in the near term and pose risks to the economic outlook.
The central bank said it will keep rates at nearly zero until it feels confident the economy has weathered recent events.
The actions are the most drastic steps since the depths of the 2008 financial crisis.
With the virus’ spread causing a broad shutdown of economic activity in the United States, the Fed faces a daunting task. Its tools—intended to ease borrowing rates, facilitate lending and boost confidence—aren’t ideally suited to offset a fear-driven halt in spending and traveling.
Still, analysts had expected the Fed to try—and thought the action could come at its next scheduled meeting on Wednesday. But the policymakers, led by Chair Jerome Powell, decided to act more quickly.
A full-point cut returns the Fed’s key short-term rate to a range near zero, where it stood for seven years during and after the Great Recession. And accelerate its purchases of Treasury bonds, the bank is trying to smooth trading in that market. Would-be sellers have run into trouble finding enough buyers for all the securities they want to unload.
All told, the Fed’s actions amount to a recognition that the U.S. economy faces its most perilous juncture since the recession ended more than a decade ago.
“I think the Fed has to bring the big guns,” said Gennadiy Goldberg, senior U.S. rates strategist for TD Securities, said before the decision was announced.
Separately, Treasury Secretary Steven Mnuchin said earlier Sunday that both the central bank and the federal government have tools at their disposal to support the economy.
Many Wall Street analysts expect the Fed will seek to revive some of the tools it used during the 2007-2008 financial crisis, including a commercial paper facility.
Mnuchin also said he did not think the economy is yet in recession. Most economists, however, believe a recession is already here, or will be soon.. JPMorgan Chase predicts the economy will shrink 2% in the current quarter and 3% in the April-June quarter.
“I don’t think so,” Mnuchin said, when asked if the U.S. is in recession. “The real issue is what economic tools are we going to use to make sure we get through this.”
On Saturday, President Donald Trump reiterated his frequent demand that the Fed “get on board and do what they should do,” reflecting his argument that benchmark U.S. rates should be as low as they are in Europe and Japan, where they’re now negative. Negative rates are generally seen as a sign of economic distress, and there’s little evidence that they help stimulate growth. Fed officials have indicated that they’re unlikely to cut rates below zero.
With the virus depressing travel, spending, and corporate investment and forcing the cancellation of sports leagues, business conferences, music performances, and Broadway shows, economists increasingly expect the economy to shrink for at least one or two quarters. A six-month contraction would meet an informal definition of a recession.
Two weeks ago, in a surprise move, the Fed sought to offset the disease’s drags on the economy by cutting its short-term rate by a half-percentage point—its first cut between policy meetings since the financial crisis. Its benchmark rate is now in a range of 1% to 1.25%.
Some analysts had forecast that the Fed would reduce its rate by just one-half or three-quarters of a point on Wednesday, rather than by a full point.
But policymakers have largely accepted research that says once its benchmark rate approaches zero, it would produce a greater economic benefit to cut all the way to zero rather than just to a quarter- or half-point above. That’s because it takes time for rate cuts to work their way through the economy. So if a recession threatens, quicker action is more effective.