The Federal Reserve lowered the target range of the federal funds rate to zero percent to 0.25% over the weekend in response to the potential economic impact of the coronavirus (COVID-19). According to WalletHub, this is the first time since 2008-2015 that the Fed has cut its target rate nearly to zero.
“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 Federal Open Market Committee wrote in a press release. “This action will help support economic activity, strong labor market conditions, and inflation returning to the committee’s symmetric 2 percent objective.”
In addition to cutting interest rates, the Fed stepped up its efforts to keep credit flowing to households and businesses with several actions.
To encourage banks to turn to the discount window to help meet demands for credit from households and businesses, the Fed lowered the primary credit rate by 150 basis points to 0.25%. This reduction in the primary credit rate reflects both the 100 basis point reduction in the target range for the federal funds rate and a 50 basis point narrowing in the primary credit rate relative to the top of the target range.
The Fed is encouraging banks to use their capital and liquidity buffers as they lend to households and businesses who are affected by the coronavirus.
“Consumer spending will go down as people stay home because of the coronavirus. That will hit a number of industries particularly hard, such as the service industry, travel providers, live entertainment venues, movie theaters and more. That in turn could lead to a domino effect, with turmoil in one industry spilling over to another,” Odysseas Papadimitriou, WalletHub CEO, said. “For example, if a restaurant owner can no longer pay rent, the property owner might not be able to pay its loan, and the bank that made the loan might end up suffering as well.”
The board has reduced reserve requirement ratios to 0% effective March 26, the beginning of the next reserve maintenance period. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.
The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank announced coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.
These central banks have agreed to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points.
The swap lines are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad.