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US Fed cuts interest rate to almost zero

By Lalit K Jha
March 16, 2020 10:39 IST
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In a drastic measure to stem any major disruption to the US economy as a result of the coronavirus outbreak, the Federal Reserve has cut its benchmark interest rate to almost zero and said it would buy USD700 billion in bonds. 

IMAGE: US Federal Reserve chairman Jerome Powell with US President Donald Trump. Photograph: Carlos Barria / Reuters.

The covid-19 pandemic has sickened more than 156,000 people worldwide and left more than 5,800 dead. The death toll in the US stands at 68, while infections neared 3,700. 

Scientists, research institutions and pharmaceutical companies in the country are racing against time to find a vaccine to the virus that has spread across the world and is having a major disruptive impact on the economy, particularly in the global supply chain. 

The Federal Reserve on Sunday announced slashing the key rate and buying USD700 billion in treasury and mortgage-backed securities to help the economy withstand the viral outbreak. "The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States," the Fed said in a statement. 


Global financial conditions have also been significantly affected, it said, and noted that available economic data showed the US economy came into this challenging period on a strong footing. 

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

"We have responded very strongly not just with interest rates but also with liquidity measures today," Fed Reserve Board Chairman Jerome Powell told reporters at a news conference. 

US President Donald Trump, who a day earlier was very critical of the Fed, welcomed the move. "I want to congratulate the Federal Reserve," he said. "People in the market should be very thrilled. ... We got it down to potentially zero," the president added. 

The Federal Reserve said that it has decided to lower the target range for the federal funds rate to 0-0.25 per cent. It 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. 

"This action will help support economic activity, strong labour market conditions, and inflation returning to the committee's symmetric two percent objective," the Fed said. 

The Federal Reserve said that it would continue to monitor the implications of incoming information for the economic outlook, including that of public health, as well as global developments and muted inflation pressures, and will use its tools and act appropriately to support the economy. 

In determining the timing and size of future adjustments to the stance of monetary policy, the committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric two per cent inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments, the Fed said. 

It added that to support the smooth functioning of markets for treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over the coming months, the committee would increase its holdings of treasury securities by at least USD500 billion and agency mortgage-backed securities by at least USD200 billion. 

The committee will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. 

In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate, the Fed said.

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Lalit K Jha in Washington, DC
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