Federal Reserve slashes rates, launches stimulus programme

The Federal Reserve cut interest rates to between 0.00% and 0.25% on Sunday as it announced the launch of a $700bn stimulus programme to help counter the impact of the coronavirus pandemic.

The Fed said in a statement: "The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States.

"The effects of the coronavirus will weigh on economic activity in the near-term and pose risks to the economic outlook.

"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 goal."

The central bank also said it was renewing its bond-buying campaign. It will buy at least $500bn in Treasury bonds and at least $200bn in mortgage-backed securities to lower rates for mortgages and other consumer and business loans.

In addition, the Fed launched a dollar-swap plan in coordination with the Bank of Canada, the Bank of Japan, the Bank of England, the European Central Bank and the Swiss National Bank, to boost liquidity in the US dollar.

The US central bank had been due to kick off a two-day Federal Open Market Committee meeting on 17 March, with a policy announcement on 18 March, but the decision was brought forward due to the escalating pandemic.

The move came less than two weeks after the Fed announced a surprise 50 basis points cut to its benchmark rate to between 1.00% and 1.25% from between 1.50% and 1.75%.

"The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity," it said at the time.

"In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate. The committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy."

Naeem Aslam, chief market analyst at AvaTrade, said the Fed cutting the interest rate to zero and restarting the quantitive easing package was "the biggest nuclear bazooka".

"This is also a big warning for those banks who have taken the chainsaws to cut the US GDP forecast for the second quarter," he said.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: "We have been urging this action for some time and we’re very happy that the Fed did not wait until Wednesday’s meeting. Time is of the essence. Lower rates and QE should, other things equal, boost all asset price, depress the dollar, and boost money supply growth.

"Other things are not equal, though, and we think the Fed has acted now to try to get ahead of what likely will be terrible news on the spread of the virus, both inside and outside the US, over the next couple of weeks. The lesson of Hubei and Korea is that lockdowns and social distancing measures take two or three weeks to bring about a clear downshift in case trajectory, with deaths then following."

Shepherdson added that the Fed can’t do all the work itself. "Congress has no choice but to pass the House bill, or something like it, and then immediately start work on a much bigger bill to push cash at small/medium-sized businesses, the self-employed, and households. Bailouts for airlines and parts of the hospitality business are inevitable.

"The virus outbreak makes the country poorer. But that’s not an excuse for Congress not to do as much as possible in order to limit the immediate hit. They could find $1trn for a completely ineffective tax cut, and now they need to find another $1trn, at least, to rescue the economy."

Ranko Berich, head of market analysis Monex Europe, said global central banks are now "at the absolute limit" of their ability to mitigate the impact of the virus on the real economy.

"The ECB, for instance, all but conceded defeat and begged for fiscal assistance at last week’s press conference. Some smaller central banks will be able to begin asset purchases as the shock worsens, and the Fed could expand QE or commence open ended purchases. But these measures may pale in comparison to the sheer unprecedented scale and duration of the virus threat."