Virus spread prompts Fed to slash rates to near zero

Pedro Gonçalves
Virus spread prompts Fed to slash rates to near zero

The US Federal Reserve cut interest rates to nearly zero on Sunday in another emergency move to help shore up the US economy amid the rapidly escalating global coronavirus pandemic.

Chairman Jerome Powell said at a news conference that the virus "will surely weigh on economic activity both here and abroad for some time."

It was the Fed's first move since last year, when it reduced its key short-term rate three times. It's also the first time it's cut rates between policy meetings since the 2008 financial crisis, and it is the largest rate cut since then. As the NY Times writes, the Fed deployed its 2008 arsenal all in one weekend.

We saw a risk to the economy, and we chose to act"

In another move to boost growth, the central bank also said it would purchase $700bn in Treasury and mortgage-backed securities to encourage lending  and to try and stabilise the global economy. The Fed also slashed reserve requirements for thousands of banks to zero.

"These are strong measures," Fed chairman Jerome Powell said in a rare Sunday news conference, warning that growth in the second quarter would be slow. "The virus will run its course and economic activity will resume. In the meantime, we will act to support the flow of credit to companies and individuals." 

Rising uncertainty about how and when the threat will be resolved is pressuring markets. Powell said that since last week, when several Fed officials had said they saw no urgent need to cut rates, "we have seen a broader spread of the virus."

"So, we saw a risk to the economy, and we chose to act," he added. Powell acknowledged that the "ultimate solution to this challenge will come from others, most notably health professionals."

US President Donald Trump called the move "terrific" and "very good news".

"I want to congratulate the Federal Reserve," he said at a White House briefing of his coronavirus task force. "What's happened with the Fed is phenomenal news."

"I can tell you, I'm very happy. I didn't expect this. And I like being surprised."

The central bank already cut interest rates by half a percentage point on March 3 at an emergency meeting, the first emergency cut since the financial crisis in 2008. The central bank will now cut rates to a target range of 0% to 0.25%.


Subscribe to International Investment's free, twice-daily, newsletter