The US Federal Reserve cut rates to near zero, resumed buying bonds, and partnered with other central banks to secure liquidity for dollar loans to help put a floor in a global economy rapidly disintegrating during the coronavirus pandemic.
And in a dramatic move that underscored the depth of the economic threat as businesses close and potentially millions of jobs evaporate, the Fed encouraged banks to leverage trillions of equity and liquid assets formed as capital buffers since the financial crisis to support businesses and people whose lives have been turned upside down by the virus.
“The virus is having a profound effect on people across the United States and around the world,” said Fed Chairman Jerome Powell at a press conference after cutting short-term rates in a target range of 0% to 0.25%, and announced at least $ 700 billion in treasury bills and mortgage-backed securities purchases in the coming weeks.
“We are really going to use our tools to do what we need to do here,” said Powell, adding that the Fed has become “strong” and could increase bond purchases and use other tools to support the functioning of the market. and the flow of credit, which he called the “most important” function of the Fed.
As governments restrict rallies, businesses and schools close, and families begin to crouch to reduce the spread of the virus, Fed officials “will do what we can to alleviate the hardship” as economic activity slows this quarter and next year, he said.
Powell said he could not say how long or how deep the recession will be, but promised to keep rates where they are until Fed officials are “confident that the economy has survived recent events and is on track to meet its maximum employment and price stability targets. “The Fed will delay official economic forecasts until June, he said.
The Fed and other major foreign central banks have also cut the prices of their swap lines to facilitate the supply of dollars to financial institutions around the world faced with tensions in the credit markets.
The action was tantamount to an implicit recognition that the epidemic was causing a “sudden halt” in economic activity in the United States and abroad, “said Sebastian Galy, senior strategist for Nordea in Luxembourg.
And Julia Coronado, president of MacroPolicy Perspectives and former Fed economist, said she thought more aid could be on the way.
“I think this is the beginning and not the full scope of what we are going to see,” she said, adding that the Fed could coordinate with the Treasury to launch other emergency lending tools, including one aimed at adding short-term liquidity. business credit markets.
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In a follow-up move, eight of the largest US banks, in a separate statement, said they would stop share buybacks in the second quarter, “in accordance with our collective goal of using our large capital and cash to provide maximum support to individuals and small businesses and the wider economy through loans and other important services. “
The march of the virus across America, from Washington to California, passing by New York, closed schools, started grocery shopping, closed retailers and ended sporting events, young and old, and the America’s top infectious disease specialist, Dr. Anthony Fauci, warned on Sunday that conditions would likely worsen before improving.
Sunday’s dramatic measures show that “the Fed is serious, the Fed is targeting liquidity in the credit and treasury markets and is trying to make sure they work without dislocation,” said Quincy Krosby, chief strategist markets at Prudential Financial in New York.
Despite support from central banks, futures on the S&P 500 index traded 4.8%. The dollar dropped. US crude oil fell more than $ 1 a barrel to its lowest level. And futures prices for 10-year US Treasuries opened more than one point higher.
On Sunday, the Fed took further steps to increase the liquidity of the US financial system.
It lowered the primary credit rate by 150 basis points to 0.25% to encourage banks to take advantage of its emergency lending window. Deposit-taking institutions can borrow from this so-called discount window for periods as long as 90 days, payable in advance and renewable by the borrower daily, according to the press release.
The Fed also said it would support US banks that began to exploit the capital and liquidity buffers they had built up after the 2008 financial crisis and that it would reduce the reserve requirement ratios to 0 % as of March 26.
“This action eliminates reserve requirements for thousands of deposit-taking institutions and will help support loans to households and businesses,” said the Fed.
President Donald Trump called these actions “good news” that “makes me very happy”.
This is the third time this month that the US central bank has taken emergency measures to protect the financial markets and the economy.
On March 3, it lowered interest rates by half a percentage point and last week, in the face of accelerating market collapse, it injected liquidity into the short-term funding markets and launched a wave of purchases of Treasury securities.
The Fed held the political meeting on Sunday instead of its scheduled meeting Tuesday and Wednesday, said Powell.