Chairman Jerome Powell noted that the coronavirus “poses evolving risks to economic activity.”
WASHINGTON (AP) — The Federal Reserve took massive emergency action Sunday to try to help the economy withstand the coronavirus by slashing its benchmark interest rate to near zero and saying it would buy $700 billion in Treasury and mortgage bonds. The Fed’s surprise announcement signaled its rising concern that the viral outbreak will depress economic growth in coming months, likely causing a recession, and that it’s poised to do whatever it can to counter the risks. It cut its key rate by a full percentage point to a range between zero and 0.25%. The central bank said it will keep its rate there until it is “confident that the economy has weathered recent events.” The Fed will buy at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed securities. This amounts to an effort to ease market disruptions that have made it harder for banks and large investors to sell Treasuries as well as to keep longer-term borrowing rates down. All told, the Fed’s aggressive actions are intended to keep financial 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 in some cases. “This is a break-the-glass moment” for the Fed, said Mark Zandi, chief economist at Moody’s Analytics. “They are throwing everything they’ve got at this. My sense is they must be nervous about the credit system not functioning properly. They are trying to shore up confidence.” By slashing its benchmark short-term rate and pumping hundreds of billions of dollars into the financial system, the Fed’s moves Sunday 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. The new bond purchases will be similar to the several rounds of “quantitative easing,” or QE, that the Fed conducted during and after the Great Recession to bolster the financial system and the economy. Chairman Jerome Powell, in a conference call with reporters, said the Fed’s purchases are intended to ensure that credit markets function properly. Shoring up the Treasury bond market and other sources of credit, Powell added, is vital to the health of the economy. Powell warned that the economy would likely shrink in the April-June quarter because of the widespread shutdowns from the coronavirus and a broad pullback in consumer spending. He noted that the necessary behavioral changes being made across the country to stem the outbreak — an avoidance of travel, shopping and mass gatherings — are inherently harmful to the economy, which he said had been in solid shape before the virus hit. “Ultimately, the virus will run its course and the U.S. economy will resume a normal level of activity,” Powell said, though he didn’t speculate on when the rebound might occur. “The virus is having a profound effect on the people of the United States and across the world,” Powell said. The primary response will need to come from health care providers, he stressed, as many experts have. The Fed is joining in a coordinated global action, with the 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. This move is intended to ensure that foreign banks continue to have access to dollars that they lend to overseas companies. Powell said the Fed acted Sunday after having decided to meet this weekend in lieu of the meeting its policy committee had been scheduled to hold Tuesday and Wednesday this week. He also said the central bank decided not to issue its usual quarterly projections for the economy and interest rates this week because the virus is altering the economic picture too quickly to make such projections useful. Nick Note: Did i mention they will not not NOT NOT lose the system. i just saw the kitchen sink go by.