The Fed Cuts Interest Rates to Nearly 0% to Combat Economic Slowdown Risks From Coronavirus Crisis
In an emergency move, the Federal Reserve has cut its benchmark interest rate to nearly zero to help fight the coronavirus outbreak that’s threatening millions and nudging America into an economic slowdown. The nation’s central bank announced Sunday it would cut the federal-funds rate to a range between 0% and 0.25%.
The decline of 1 percentage point is the biggest move in interest rates since the Fed cut rates during the financial crisis and its first emergency cut since 2008. Normally, the Fed decides what direction to take on interest rates at scheduled meetings around eight times annually.
Part of a string of statements and unprecedented actions, the Fed also announced plans to acquire $700 billion in treasury and mortgage-backed securities.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” the Fed said in a news release on March 3, when it cut the rates to 1 to 1.25 percent.
The Fed plans to buy at least $500 billion in treasury securities and $200 billion in mortgage-backed securities over the coming months. Churns in the treasury market drove the Fed to restart its quantitative easing program with purchases of U.S. Treasuries and agency mortgage-backed securities, Yahoo Finance reported. The Fed said it will begin those purchases with a $40 billion buy beginning Monday and an $80 billion purchase of agency MBS over the next month.
The Fed’s urgent action Sunday comes two weeks after the powerful banking regulator cut its benchmark interest rate to help prevent a downturn to the economy from the coronavirus crisis.
When the Fed cuts rates, the action is geared to encourage more borrowing and spending to stimulate the economy. The move trims short-term rates the Fed controls, determining the direction of some key consumer and business loans. The cuts can help lower costs for consumers and entrepreneurs on many financial products, including home equity loans, adjustable-rate mortgages, credit cards, and small business loans among them.
“The actions we have announced today will help American families and businesses, and indeed, our entire economy weather this difficult period and will foster a more vigorous return to normal once the disruptions from the coronavirus abate,” Fed chairman Jerome Powell stated in opening remarks at a press conference Sunday. “We will continue to closely monitor economic and financial developments and their implications for the economic outlook.”
William Michael Cunningham, an Washington, D.C.-based economist and banking expert who runs Creative Investment Research, said his firm questions if the Fed discussed the impact of the crisis on communities of color, specifically African American communities. “We are concerned because of the lack of a person of color on the Board and due to the fact that the 2008 crisis had a disproportionate impact on black communities.”
He added while 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, this will only work for the black community if these banks do so in a non-discriminatory manner.
Cunningham says the Bureau of Labor Statistics reports that “Black and Hispanic workers are more than twice as likely to receive poverty-level wages compared to their white counterparts. Black women workers suffer the most with 10 percent classified as the working poor, compared to 3.5% of white men.
Still, he believes the Fed’s latest move could be helpful.
“Overall, the move is positive, since the Fed is responding aggressively, but it would be a shame if all communities are not benefited by this action,” Cunningham said.