On Sunday night the Federal Reserve announced that it would cut interest rates to 0% (actually a policy range of 0% to 0.25%) from the current 1.00% to 1.25% range. The central bank will also resume its program of quantitative easing by buying at least $700 billion in government and mortgage-backed securities. ($5oo billion in purchases will be in the Treasury market with the rest targeted at mortgage -backed securities.)
“The [Fed] expects to maintain this target range until it is confident that the economy has weathered recent events,” the Federal Reserve said.
The timing (Sunday night ahead of a scheduled Wednesday meeting of the Fed Open Market Committee) and the size of the cut (100 basis points instead of the normal 25 basis points or the 50 basis points that Wall Street imagined) are an attempt to get the biggest bang for the two of the last remaining tools in the Fed’s kit. The Fed cut interest rates by 50 basis points in an emergence move on March 3. And the central bank injected $1.5 trillion into the bond market last week to add liquidity to the short-term money market.
Once you’re at 0% and buying $700 billion in bonds and mortgage-backed securities, it’s not clear what else a central bank can do to prop up economic growth and support the financial markets.
Besides the $700 billion in purchases of bonds and mortgage-back securities–designed to provide extra liquidity to the bond market and to stimulate the economy by lowering effective interest rates–the Fed has also extended the terms and lowered the interest rates it charges banks to borrow from the central bank. The Fed is giving banks the ability to borrow money from the central bank for up to 90 days instead of the overnight duration of most loans offered by the Fed previously. Starting Monday, banks can barrow from the Fed at a rate of just 0.25 percent, a massive cut from the 1.75 percent rate that was in effect before.
Big U.S. banks including JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street all announced shortly after the Fed reported its decision that they will stop repurchasing their shares and use that money to make loans to customers instead.
President Donald Trump, who has been pushing the Fed to lower rates to 0%, congratulated the Fed and said its decision to lower interest rates “makes me very happy.”
The Fed has cancelled its scheduled Tuesday-Wednesday meeting this week.
