federal reserve

What You Need to Know About the New Federal Reserve Interest Rate

The surprise intervention was an acknowledgement by the Fed that the economy seems suddenly on the brink of recession.

A board above the trading floor of the New York Stock Exchange shows the closing number for the Dow Jones Industrial Average, March 3, 2020. The Federal Reserve slashed their benchmark interest rate on Sunday to try to blunt the damage the coronavirus outbreak has have on the U.S. economy.
Richard Drew/AP

Brandishing an array of financial weapons, the Federal Reserve announced extraordinary action Sunday to try to blunt the heavy damage the coronavirus outbreak has begun to inflict on the U.S. economy.

It's slashing its benchmark interest rate to near zero. It’s buying $700 billion in bonds. It’s moving aggressively to smooth disruptions in the Treasury market.

And it's prepared to do more.

The surprise intervention was an acknowledgement by the Fed that the economy seems suddenly on the brink of recession and a signal that it will do all it can to minimize the blow to households, companies and the economy.

Collectively, its actions are intended to keep markets functioning and lending flowing to businesses and consumers. Otherwise, as revenue dries up for countless small businesses that have suddenly lost customers, these employers could be forced to lay off workers or even seek bankruptcy protection.

By slashing its benchmark short-term rate and pumping hundreds of billions of dollars into the financial system, the Fed’s moves recalled the emergency action it took at the height of the financial crisis. Starting in 2008, the Fed cut its key rate to near zero and kept it there for seven years. The central bank has now returned that rate — which influences many consumer and business loans — to its record-low level.

And yet Chairman Jerome Powell acknowledged in a conference call with reporters that the Fed's action isn’t likely to prevent the recession. The main reason: The economy is coming to a standstill because of the necessary behavioral changes being made across the country to stem the viral outbreak — an avoidance of travel, shopping and mass gatherings.

Rather, the economic outlook, the Fed recognizes, depends mainly on how quickly the United States can arrest the spread of the virus.

So what, exactly, did the Fed announce Sunday? And why?

More than 20 people have died in the United States from the coronavirus, with over 500 people diagnosed with the virus. The outbreak has impacted daily aspects of American life, from the plunging stock markets to members of Congress self quarantining.


The Fed cut its short-term rate by a full percentage point, its steepest cut since the financial crisis in 2008, to a range of zero to 0.25%. That is the lowest level since December 2015, when the Fed raised rates for the first time after leaving them at nearly zero for seven years.

Over time, this move should lower a broad range of borrowing costs for things like homes, credit cards and autos. Powell said that while the move is intended to lower borrowing costs now, it would become even more important once the outbreak passes and consumers and businesses are confident enough to ramp up spending again.

President Donald Trump has urged the Fed to consider cutting rates below zero, but Powell said the Fed isn't considering that now.

"We do not see negative rates as an appropriate policy in the United States," he said on the conference call Sunday.


On Monday, the Fed will start buying at least $500 billion in Treasury securities and at least $200 billion of mortgage-backed securities issued by Fannie Mae and Freddie Mac. Those purchases are intended to smooth the functioning of the Treasury bond market and mortgage lending and to keep long-term borrowing rates down.

The Treasury market is the largest and most important such market in the world, because yields on Treasuries influence interest rates on many other loans and are used to price other global financial assets. 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. The Fed's buying is intended to plug that gap and keep rates low.

"When stresses arise in the Treasury market, they can reverberate throughout financial markets and the entire economy," Powell said.


The Fed said it has dropped its requirement that banks hold cash equal to 10% of their customers' deposits, thereby allowing banks to lend that money instead. It also said that banks can use additional cash buffers that were imposed after the 2008 financial crisis for lending. This move addresses complaints from many banks that regulatory limits were inhibiting their ability to lend when credit is in high demand.

Fears of catching the coronavirus has halted global supply chains, from automobiles to wedding dresses to everyday items, as markets and manufacturing companies in China and other affected countries grapple with increasing caseloads of COVID-19. Although the CDC says the risk of contracting the coronavirus for the general public remains low, it also warns that this is an evolving situation.


The Fed is joining in a coordinated global action, with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank, to provide cheap dollar credit to banks overseas. The swap lines offer credit for a longer period of 84 days, instead of the standing offer of one week. This move is intended to ensure that foreign banks continue to have access to dollars that they lend to overseas companies.


Fed policymakers decided to open up a little-used tool, known as the "discount window," that enables banks to borrow at very low interest rates from the Fed. It cut the interest rate for those loans by 1.5 percentage points, to just 0.25%, to encourage more banks to take advantage of the window, which carries a stigma because it's typically used by banks only when they're in trouble. It also said banks could borrow for 90 days.

Copyright AP - Associated Press
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