COVID-19: US Federal Reserve cuts interest rate to zero

By Arul Louis

March 16, 2020

New York: The Federal Reserve has taken the extraordinary action of slashing the interest rate effectively to zero in emergency action to prop up the US economy battered by the coronavirus crisis and facing the risk of a recession.

Federal Reserve Chairman Jerome Powell said on Sunday evening that the rate cut and other actions were taken were meant to help the US “weather this difficult period.”

Other measures announced by the Federal Reserve, the country’s central bank commonly referred to as the Fed, include pumping $700 billion into the US economy by buying government bonds worth $500 billion and $200 billion of mortgage-backed securities.

This is expected to lower the cost of long term debt and ease pressures on the housing market.

US President Donald Trump, who had been criticising Powell for not cutting the interest rate and taking other measures to stimulate the economy, congratulated him after the Fed action was announced.

“That’s really good news, that’s really great for our country,” he said.

The benchmark Fed interest rate which was 1 per cent to 1.25 per cent after a 0.5 per cent cut on March 3 was cut effectively on Sunday by another 1 per cent to the 0 per cent to 0.25 per cent range.

Powell predicted that the coronavirus pandemic will “have a significant effect on economic activity in the near term.”

To counteract this, he said, “We are prepared to use our full range of tools to support the flow of credit to help households and businesses.”

The Fed measures are aimed at lowering the interest rates banks charge consumers and businesses and making loans available to them to meet the setbacks from the coronavirus.

The measures are the biggest steps taken since the 2008 financial crisis that plunged the nation into a recession, which now stares it in the face as many businesses are being forced to cut back operations and tens of thousands of workers are at risk of losing their jobs.

The stock markets have plunged about 20 per cent since the highs in February, despite the about 9 per cent bounce on Friday, putting them in bear market territory.

The latest measures follow the Fed’s offer last week to make $1.75 trillion available for the bond market to ensure funds availability for its operations.

On Friday, Trump declared a national emergency that he said would make available $50 billion to fight the fallout of the coronavirus crisis.

The House of Representatives passed a massive relief package on Saturday morning that will be taken up by the Senate next week.

The package known as Families First Coronavirus Response Act is backed by Trump and many Republicans and it provides for paid sick leave, family leave and free testing for COVID-19.

The US now joins several countries like Japan, Germany, France and the Netherlands that have zero or negative interest rates. IANS