Economic Collapse

Global Economic Collapse and Distress of Nations: In emergency pandemic move, Fed cuts rates to zero and will purchase $700B in bonds

Global Economic Collapse and Distress of Nations: In emergency pandemic move, Fed cuts rates to zero and will purchase $700B in bonds

by Joseph Lawler March 15, 2020 The Washington Examiner

The Federal Reserve lowered its interest rate target to zero and announced large purchases of goverment bonds Sunday to protect the economy against the coronavirus pandemic.

“The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook,” the central bank’s monetary policy committee said in an unscheduled statement. The Fed will also purchase $700 billion in goverment-backed bonds in the “coming months,” a move it said was meant to ensure the functioning of financial markets.

The statement said that the central bank would leave short-term interest rates at a range of between zero and 0.25% until “it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Sunday’s surprise rate cut is the second such emergency action by the Fed in the past month as it has reckoned with the economic fallout from the pandemic. Goldman Sachs chief economst Jan Hatzius projected Sunday that gross domestic product would shrink by 5% in the second quarter.

The Fed’s fear is that, beyond the short-term cessation of commerce needed to prevent the spread of the virus, fear about the future might be risking a longer-term recession and job loss beyond what is necessary.

One member of the monetary policy committee, Federal Reserve Bank of Cleveland president Loretta Mester, objected to the decision to lower rates all the way to zero, from a range of 1% to 1.25%. Fed Chairman Jerome Powell announced a press conference for Sunday evening.

“I want to congratulate the Federal Reserve,” President Trump said at a coronavirus press conference that took place just minutes after the announcement.

“I’m very happy,” he said.

Sunday’s action by the Fed leaves them with limited traditional options for further easing money, should they decide doing so is necessary. In recent weeks, yields on longer-term bonds have fallen near zero, leaving little scope for the kind of large-scale bond purchasing, or quantitative easing, the Fed has previously undertaken to spur spending.

The monetary policy committee had been scheduled to have a two-day meeting in Washington, D.C., this week, but determined that the rate cut could not wait until then.

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