The US Federal Reserve has cut its target rate to 0-0.25% following an extraordinary meeting of the Federal Open Market Committee, and pledged to inject liquidity into the US financial system through purchases of some $500bn of US Treasuries, and $200bn of agency mortgage-backed securities.
Liquidity operations will target areas including the so-called discount window - the Fed will lower the primary credit rate by 150 bps to 0.25% effective 16 March; facilatating intraday credit; adjusting bank capital and liquidity buffers; and reducing resere requirements - the ratios wlil drop to 0% effective 26 March, which "eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses."
The Fed has also moved to join the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank, in coordinated action to enhance liquidity via US dollar liquidity swap line arrangements.
"These central banks have agreed to lower the pricing on the standing US dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the US dollar overnight index swap (OIS) rate plus 25 basis points. To increase the swap lines' effectiveness in providing term liquidity, the foreign central banks with regular US dollar liquidity operations have also agreed to begin offering US dollars weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered. These changes will take effect with the next scheduled operations during the week of March 16. The new pricing and maturity offerings will remain in place as long as appropriate to support the smooth functioning of US dollar funding markets."
Commenting further on its action, the Fed stated that: "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 US economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2% percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed."
"Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0-0.25%. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee's symmetric 2% objective."
"The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2% inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
"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. To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500bn and its holdings of agency mortgage-backed securities by at least $200bn. The Committee will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate."
"Voting for the monetary policy action were Jerome H. Powell, chair; John C. Williams, vice chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Randal K. Quarles. Voting against this action was Loretta J. Mester, who was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but preferred to reduce the target range for the federal funds rate to 0.5-0.75% at this meeting."