Fed Takes Measures to Offer Support Amid Coronavirus

17 Mars, 2020, 04:41 | Auteur: Auguste Feret
  • Fed Takes Measures to Offer Support Amid Coronavirus

In the US, the Federal Reserve slashed its benchmark interest rate to zero and launched a massive quantitative easing program.

Also, traders probably also realize that the Fed's move to cut the FFR to near zero now than do it over time through a number of smaller cuts shows that it must be very anxious about the USA economy.

The US Federal Reserve has cut its key interest rate to virtually zero and launched a massive $700 billion quantitative easing programme. The central bank also urged banks to supply credit to the economy through the elimination of reserve requirements and by allowing financial firms access to capital.

The Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Federal Reserve and Swiss National Bank announced a coordinated action to enhance the provision of liquidity via the standing USA dollar liquidity swap line arrangements.

Donald Trump congratulated the Fed's moves and called them "terrific" and "very good news". "It makes me very happy", the president said.

"The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals", the Federal Reserve said in a statement, adding that the COVID-19 pandemic has "harmed communities and disrupted communities in many countries".

The Federal Reserve expects to maintain the low interest rates until the United States economy recovers from COVID-19's hold.

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"The glib answer is that "this was already priced in" - and to some extent the rate cut and eventual return to QE were anticipated", said Ian Lyngen, head of USA rates strategy at BMO Capital Markets.

Former Bank of England board member Adam Posen told AFP central banks are showing they have learned the lessons from the last crisis: "Don't wait for the data".

"We have to be realistic that there's a limit on what monetary policy can achieve in this environment", he said, while praising the Fed's signal to banks that they should not just sit on their cash.

Although the Fed's actions increases liquidity and makes it easier for USA businesses and households to obtain loans, most traders probably understand that the COVID-19 crisis is more of a health crisis than a financial crisis (even though the former can cause the latter) and such actions by the world's central banks are unlikely to be very effective in reducing COVID-19's impact on the global economy since nearly every kind of business will be negatively affected by the lockdowns and travel bans being announced all over the world.

In a return of quantitative easing, the Fed plans to buy $500bn of USA government bonds and $200bn of mortgage-backed securities to smooth over market disruptions that have made it hard for banks and large investors to sell Treasuries.

Fed policymakers made an emergency half-point rate cut about two weeks ago and were set to meet Tuesday and Wednesday for a regularly scheduled meeting, when analysts expected more action to be taken.



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