Fed Bought Time With Emergency Cut While Eyeing New Programs
An American flag flies outside the Marriner S. Eccles Federal Reserve building in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

Fed Bought Time With Emergency Cut While Eyeing New Programs

(Bloomberg) -- Federal Reserve officials already saw a need to get to work on novel programs to cushion the economy from the blow of the coronavirus outbreak when they announced an emergency interest-rate cut on a Sunday evening in mid-March.

At that point, policy makers at the Fed saw gathering downside risks as warranting a “forceful” response, according to a record of their unscheduled gathering via video conference on March 15.

They voted to slash their benchmark rate to nearly zero and restart massive bond-buying programs to pump cash into the banking system as various corners of financial markets seized up.

Fed Bought Time With Emergency Cut While Eyeing New Programs

Looking Ahead

But the minutes of the emergency gathering, which supplanted a meeting supposed to have been held later in the week, showed they were already anticipating the need to deploy new programs -- as they did over the following days.

TOPLive: Five Takeaways From Fed Minutes of March Meetings

“Participants generally noted that other measures to support the flow of credit to households and businesses, including those that relied on section 13(3) of the Federal Reserve Act, might be needed in such an uncertain and rapidly evolving environment and that it would be prudent for the Federal Reserve to develop and remain prepared to implement such measures,” the minutes said.

Millions of Americans have lost their jobs over the last several weeks as state and local governments have ordered businesses to close in a bid to stem the spread of the virus. Private-sector forecasters now expect a historic contraction of U.S. economic output in the second quarter, followed by a partial rebound in the second half of the year.

Deflationary Pressures

The minutes showed officials split over how long and how severe the downturn would last, though several emphasized the “temporary nature of the shock” owing to the health of the U.S. banking system going into the crisis.

That said, there was clear understanding that the crisis would place further downward pressure on inflation, which has been running persistently below the Fed’s 2% target for much of the last eight years.

Officials noted “that a stronger dollar, weaker demand, and lower oil prices were factors likely to put downward pressure on inflation in the period ahead” and further delay its return to goal.

In an evening teleconference following the March 15 announcement, Fed Chair Jerome Powell told reporters that he expected the virus would eventually run its course and the U.S. economy would then resume a normal level of activity. But he added that “in the meantime, the Fed will continue to use our tools to support the flow of credit to households and businesses and support demand with monetary policy -- ultimately, to do what we can to see that the recovery is as vigorous as possible.”

Since then, the U.S. central bank has begun rolling out a number of emergency lending programs first deployed in the wake of the 2008 financial crisis.

Those include measures to fund short-term borrowings of companies in the commercial paper market and clean up the balance sheets of dealer banks and money-market mutual funds by accepting a wide range of securities as collateral in exchange for cash loans.

Corporate Debt

The Fed has also since announced new lending programs that would see them extend support to large companies through purchases of longer-term corporate debt, as well as facilities that will offer lifelines to small and medium-sized businesses. Investors also increasingly expect the central bank to intervene in the market for municipal debt as states and cities face an increasingly dire financial situation brought about by government-mandated shutdowns, which have decimated tax revenues.

“All participants viewed the near-term U.S. economic outlook as having deteriorated sharply in recent weeks and as having become profoundly uncertain. Many participants had repeatedly downgraded their outlook of late in response to the rapidly evolving situation,” according to the minutes.

Given the circumstances, most on the committee ultimately backed the decision to bring the benchmark rate back down to zero.

“In light of the sharply increased downside risks to the economic outlook posed by the global coronavirus outbreak, these participants noted that risk-management considerations pointed toward a forceful monetary policy response,” the minutes said.

©2020 Bloomberg L.P.

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