Daily Management Review

Coronavirus Pandemic: Interest Rate Cut To Zero By US Federal Reserve


Coronavirus Pandemic: Interest Rate Cut To Zero By US Federal Reserve
With the aim of stimulating the United States economy from slipping into a severe downturn because of the coronavirus pandemic, the US Federal Reserve brought down interest rates to zero on Sunday before markets reopened on Monday. The Fed now joins a list of major central banks of different countries that have taken emergency measures to try and avoid an economic collapse due to the pandemic.
This measure by the Fed is the first of its kind since the 2008 financial crisis and come at a time when there has been continuous drop in the global stock markets as well as alarming signals of malfunctioning of the US government bond market.
The measures taken by the Fed also reflect the severity of extent of damage that the coronavirus outbreak could cause to the American economy as well as other economies all around the world and the huge threat of the global economy slipping into a recession.  
The policy rate was cut by a full percentage point to a range of 0-0.25 per cent by the Fed which has is the lowest since 2015. A wide range of measures to support the financial markets was also announced by it which included additional asset purchase worth $700bn, expansion of its repurchase activities, dollar swap lines with foreign banks and offering a credit facility for commercial banks to make lending to businesses and household easier.
“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,” read a statement from the Fed’s Open Market Committee. “The Federal Reserve is prepared to use its full range of tools.” 
The Fed’s measures come after a terrifying few weeks at the global stock markets where the fall in stock prices in such a short duration was not seen since the global financial meltdown of 2008.
One particular cause of worry among investors last week were the signals that the US government bond market were under strain with periods when there was a fall in the value of the haven bonds even as there was a rout in the stock markets.
Its holdings of Treasury securities would be increased by at least $500bn, the Fed said on Sunday, while it would also increase its holdings of agency mortgage-backed securities by at least $200bn with the aim of providing “support the smooth functioning of markets” for “securities that are central to the flow of credit to households and businesses”. 
This emergency move by the Fed was announced three days before it was scheduled to hold a formal meeting. The Fed had been finalizing this package of support measures for the economy since Thursday when there as a 10 per cent drop in the US stocks, said Fed chairman Jay Powell, while speaking after the announcement.
Monetary policies were not the primary tool that should be used to tackle the sudden impact of the coronavirus pandemic on the economy, the Fed chairman said and added that the aim of the Sunday measures announced by the Fed was to provide some support to market function. 
“Monetary policy has a role, and it really is our original role: providing liquidity to financial systems when they’re under stress. And that’s really part of what we did today,” he said. “The other role was to support demand through lower interest rates, and we did that.” 

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