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Fed slashes interest rates to near zero to prop up economy during coronavirus pandemic

Government gives update on coronavirus response
Government gives update on coronavirus respon... 59:08

The Federal Reserve took emergency action Sunday and slashed its benchmark interest rate by a full percentage point to nearly zero to try to offset the economic impact of the coronavirus outbreak. In another move to boost growth, the central bank also said it would purchase $700 billion in Treasury and mortgage-backed securities to encourage lending. 

The Fed said in a statement that the effects of the outbreak will weigh on economic activity in the near term and pose risks to the outlook. Policy makers said they will keep rates at nearly zero until they are confident the economy has weathered the storm, which a number of economists say could push the U.S. into recession. 

"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." 

The Fed also said that it was working with central banks around the world, including the European Central Bank, the Bank of Canada, the Bank of Japan and others, in a coordinated effort to make it easier for financial institutions to trade currencies and get U.S. dollars.

The Fed's latest move to ease borrowing costs, which followed another emergency cut on March 3, is one of the most drastic steps the central bank has taken since the depths of the 2008 financial crisis. It is an effort to loosen up the country's monetary supply and stimulate to try to counter the coronavirus's growing damage to the U.S. economy and global financial markets.

Impact of interest rate cut over coronavirus 06:08

Paul Ashworth, chief U.S economist with Capital Economics, said the Fed cuts resemble its actions to shore up the economy during the global financial crisis more than a decade ago.

"So now we have the entire crisis playbook enacted before Asian markets open — with the Fed doing everything in its power, not just to support economic activity, but to keep the financial system afloat and keep credit flowing to affected households and businesses," he said in a research note. 

The Fed had been expected to take action at its scheduled meeting on Wednesday. But its preemptive move underlines policy makers' concern at how quickly the virus is shutting down key sectors of the American economy, including travel and sports.

President Donald Trump, who has repeatedly attacked Powell for his handling of monetary policy, said in a news conference on Sunday at the White House that the Fed's latest cut "makes me very happy."

"I think that people in the markets should be very thrilled," Mr. Trump added.

Coronavirus outbreak forces American life to ... 02:51

Investors, by contrast, seem less than thrilled, even with the Fed taking extraordinary measures to support the economy. U.S. stock futures fell more than 4% Sunday evening after the rate cut announcement. 

"The Fed's latest move does not change our expectation that the economy will slow dramatically in the near term," Rubeela Farooqi, chief U.S. economist with High Frequency Economics, told investors in a report.

With the virus' spread causing a broad shutdown of economic activity, the Fed faces a daunting task. Its tools — intended to ease borrowing rates, facilitate lending and boost business and consumer confidence — aren't ideally suited to offset a fear-driven halt in spending and traveling.

"We have been urging this action for some time and we're very happy that the Fed did not wait until Wednesday's meeting," said economist Ian Shepherdson, chief economist of Pantheon Macroeconomics. "In one line: Great news, but not enough on its own."

Shepherdson said Congress and the White House may need to consider "at least" $1 trillion in emergency spending to help support small and mid-sized businesses, the self-employed and millions of households under varying levels of quarantine facing the prospects of months of little to no business or income. This could include financial help for the nation's travel and hospitality industries, which have seen unusual plunges in business in barely two weeks. 

Kudlow says coronavirus bill "not perfect" bu... 06:31

The Fed's actions may amount to a recognition that the U.S. economy faces its most perilous juncture since the recession ended more than a decade ago.

"I think the Fed has to bring the big guns," said Gennadiy Goldberg, senior U.S. rates strategist for TD Securities.

Separately, Treasury Secretary Steven Mnuchin said earlier Sunday that both the central bank and the federal government have tools at their disposal to support the economy.

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