The US Federal Reserve cut its target range for the federal funds rate to 0-0.25% overnight – a full 1% down from the range it struck on 4 March.
The cut 12 days ago was by 50 basis points, to a 1-1.25% range. On both occasions the cut was because of its concern at the coronavirus, Covid-19.
In a separate international action, the Federal Reserve & 5 other central banks announced a co-ordinated action to enhance the provision of liquidity via the standing $US liquidity swap line arrangements (see detail below).
On the federal funds rate cut, the Fed said in a statement:
“Global financial conditions have also been significantly affected. Available economic data show that the US economy came into this challenging period on a strong footing. Information received since the Federal open market committee met in January indicates that the labour market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.
“Although household spending rose at a moderate pace, business fixed investment & exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food & energy are running below 2%. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed.
“Consistent with its statutory mandate, the committee seeks to foster maximum employment & price stability. 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 0-¼%.
“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 & price stability goals. This action will help support economic activity, strong labour market conditions and inflation returning to the committee’s symmetric 2% objective.”
In a second part to its statement, the Fed turned its attention to Treasury securities and ensuring the flow of cash is maintained:
“To support the smooth functioning of markets for Treasury securities & agency mortgage-backed securities that are central to the flow of credit to households & businesses, over coming months the committee will increase its holdings of Treasury securities by at least $US500 billion and its holdings of agency mortgage-backed securities by at least $US200 billion.
“The committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt &agency mortgage-backed securities in agency mortgage-backed securities. In addition, the open market desk has recently expanded its overnight & term repurchase agreement operations. The committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.”
One committee member, Loretta Mester, president & chief executive of the Federal Reserve Bank of Cleveland. wanted a smaller rate cut, to 0.5-0.75%.
Credit support action
In a related set of actions to support the credit needs of households & businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital & liquidity buffers, reserve requirements and – in co-ordination with other central banks – the $US liquidity swap line arrangements.
6 central banks announce co-ordinated action
In a separate international action, the Federal Reserve & 5 other central banks announced a co-ordinated action to enhance the provision of liquidity via the standing $US liquidity swap line arrangements.
The other central banks are the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank & the Swiss National Bank.
They’ve agreed to lower the pricing on the standing $US liquidity swap arrangements by 25 basis points, so the new rate will be the $US overnight index swap (OIS) rate plus 25 basis points. To increase the swap lines’ effectiveness in providing term liquidity, the foreign central banks with regular $US liquidity operations have also agreed to begin offering $US weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered. These changes will take effect with the next scheduled operations this week.
The banks commented: “The new pricing & maturity offerings will remain in place as long as appropriate to support the smooth functioning of $US funding markets.”
The swap lines are available standing facilities and serve as a 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 & businesses.
15 March 2020: Federal Reserve actions to support the flow of credit to households & businesses
4 March 2020: Fed cuts because of virus
Attribution: Fed release.