MNI POLICY: Fed Returns to Zero Lower Bound As Pandemic Widens

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve slashed its policy rate by 100 bps

late Sunday and pledged to buy at least USD700 billion of government securities,

returning the fed funds target to the zero bound for the first time since the

financial crisis.

     The move at 5pm Washington time was made to support the U.S. economy as the

coronavirus pandemic threatens to shrink business activity globally. 

     The U.S. central bank also rolled out a slew of actions to promote credit

flows, including lowering the discount rate by 150 bps to an all-time low of

0.25%, encouraging banks to use their capital and liquidity buffers and intraday

credit extended by the Fed and reducing reserve requirement ratios to zero. 

     In coordination with five other major central banks, the Fed also announced

swap lines to bolster dollar liquidity. The moves come before European and North

American markets open on Monday after President Donald Trump declared a national

emergency Friday while countries like France, Spain and Canada moved over the

weekend to ban most public gatherings. 

     "The coronavirus outbreak has harmed communities and disrupted economic

activity in many countries," the FOMC said in a statement. "The effects of the

coronavirus will weigh on economic activity in the near term and pose risks to

the economic outlook." 

     "In light of these developments, the Committee decided to lower the target

range for the federal funds rate to 0 to 1/4 percent. The Committee 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 goals," the Fed said. 

     "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 coming months the Committee will increase its

holdings of Treasury securities by at least $500 billion and its holdings of

agency mortgage-backed securities by at least $200 billion," the Fed said.  

     The FOMC added it will also reinvest all principal payments from its

holdings of agency debt and agency mortgage-backed securities in agency

mortgage-backed securities. 

     The New York Fed's Open Market Desk last week also expanded its overnight

and term repurchase agreement operations. 

     Only one voting member of the FOMC, Cleveland Fed's Loretta Mester,

dissented on Sunday's action. The Fed statement said while she is "fully

supportive of all of the actions taken to promote the smooth functioning of

markets and the flow of credit to households and businesses," she preferred to

cut by 50 bps instead. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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