Federal Reserve Drops Rates to Zero

The Federal Reserve has dropped interest rates to zero in response to the COVID-19 outbreak

On Sunday, the Fed made its second inter-meeting cut in as many weeks, dropping the fed funds target range to 0-.25%. Along with the rate cut, the Fed stated plans to purchase at least $700 billion in securities and increase the availability of credit to banks in the treasury market. Stock markets did not respond well to the slashing of rates. The Dow Jones sank 12.9% representing the second-worst single day performance ever.

With rates near zero and the balance sheet expanding, it seems the Fed might be running out of options. However, Jerome Powell and company have shown strong support for markets throughout the COVID-19 crisis and could be prepared to implement unorthodox monetary policy actions to help the economy weather the storm.

More Than a Rate Cut

The Fed was not shy when stating it would keep interest rates at zero until it was “confident that the economy [had] weathered recent events.” In addition, central bankers released a statement expressing their intent on working directly with foreign central banks to enhance liquidity worldwide.

Fed officials lowered the discount rate substantially, dropped the reserve requirement to zero, and pledged intraday credit to support liquidity for households and businesses. By releasing this list of actions in the lending market, the Fed hopes to free up cash flow for workers and businesses affected by multiple state-wide shutdowns.

What options remain available for the FOMC?

Some were quick to point out that the Fed’s Sunday actions hadn’t touched the commercial paper market, which had been struggling over the past week. However, additional measures were implemented on Tuesday in hopes of loosening up those markets. It seems The Fed is willing to use every tool at their disposal to support the economy during this outbreak. Stay tuned to find out what the Fed is doing as this situation unfolds.

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