News: Fed cuts rates to zero and launches massive $700 billion QE program
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Key points:
- On Sunday, March 15, 2020, the Federal Reserve announced it was lowering its benchmark interest rate to zero and launching a new round of quantitative easing.
- The quantitative easing program will result in the purchase of $700 billion in assets including Treasury securities and mortgage-backed securities.
- Markets reacted negatively, with Dow futures indicating a 900-point drop at the market open Monday morning.
A situation taken very seriously by the Fed:
The Federal Reserve, saying that "the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States," cut interest rates to near zero on Sunday and launched a massive $700 billion quantitative easing program to protect the economy from the effects of the virus.
The new federal funds rate, used as a benchmark for short-term lending by financial institutions and as an anchor for many consumer rates, will now be set between 0 and 0.25 percent, compared with a previous range of 1 to 1.25 percent.
In the face of very troubled financial markets, the Fed also cut the emergency discount window lending rate for banks by 125 basis points to 0.25 percent and extended the term of loans to 90 days.
Despite this aggressive move, the initial market reaction was negative. Dow futures indicated a drop of about 1,000 points at the opening of Wall Street Monday morning.
Coordinated global action:
The Fed also reduced reserve requirements for thousands of banks to zero. In addition, in a globally coordinated move by central banks, the Fed said the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank have taken steps to increase dollar liquidity worldwide through existing dollar swap arrangements.
The banks lowered the rate on these swap lines and extended the term of these loans. The Fed's actions appeared to be the largest set of actions ever taken by the bank in a single day, in many ways reflecting its efforts during the months-long financial crisis. Sunday's action includes several programs, rate cuts and quantitative easing measures, but all in one day.
What will happen in the next few weeks?
No one can know, but we have several pieces of information:
"We will hold the rate at this level until we are satisfied that the economy has withstood recent events and is on track to achieve our maximum employment and price stability objectives," said Jerome Powell, chairman of the Fed's board of governors. "This is the test."
The quantitative easing will take the form of $500 billion in Treasurys and $200 billion in agency-backed mortgage securities. The Fed said the purchases will begin Monday with a $40 billion payment.
The Fed added in its statement that it "stands ready 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 objectives."
The move follows several actions by the Fed over the past two weeks, which included cutting emergency interest rates by 50 basis points and expanding the supply of overnight credit, or repo, for the financial system to $1.5 trillion.
Sources : CNBC
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