Fed Drops Rates to Zero, Announces Further Actions to Support Economy

Underscoring the serious threat that the coronavirus pandemic poses to the global economy, the Federal Reserve on Sunday took emergency action to support the economy and the credit needs of households and businesses.

The Federal Open Market Committee voted to reduce the federal funds rate by 100 basis points to a range of zero to 25 basis points. “Available economic data show that the U.S. economy came into this challenging period on a strong footing,” the FOMC said, but “[t]he effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook.”

The FOMC said that it expects to maintain its near-zero 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 FOMC also said it would resume asset purchases, increasing its holdings of Treasurys by at least $500 billion and of agency mortgage-backed securities by at least $200 billion in coming months.

To help address credit challenges in light of the pandemic, the Fed lowered the primary credit rate paid by institutions using the discount window, encouraged banks to use intraday credit from the reserve banks and cut reserve requirement ratios to zero, effective March 26.

Noting that U.S. banking firms “have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers,” the Fed also encouraged banks to use their capital and liquidity buffers to lend to coronavirus-affected borrowers. “The Federal Reserve supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner,” the Fed said.

The Fed and five other central banks also said they would ease strains in global funding markets through standing U.S. dollar liquidity swap line arrangements.