Why the Fed Is Bringing Big Firepower to Combat Virus’s Threat
The Fed on Sunday concentrated monetary policy on helping the U.S. economy and financial markets weather the coronavirus outbreak.
(Bloomberg) -- The Federal Reserve on Sunday concentrated a massive amount of monetary-policy firepower on helping the U.S. economy and financial markets weather the coronavirus outbreak.
The central bank slashed its benchmark interest rate by a full percentage point to near zero and promised to boost its bond holdings by at least $700 billion -- a combined force aimed at thwarting the potential effects that include the possibility of large job cuts and revenue shortfalls at American businesses.
The following charts help show why the Fed, which had already cut interest rates by half a percentage point on March 3 in the first such emergency move since the 2008 financial crisis, took a bigger swing aimed at mitigating the disease’s negative economic impact:
Economic growth was steady around 2% prior to the outbreak. Now, with more Americans hunkering down at home and curtailing social activities from attending sporting events to dining out to travel, consumer spending is slowing. That explains why economists are dialing back economic-growth projections.
“We expect U.S. economic activity to contract sharply in the remainder of March and throughout April as virus fears lead consumers and businesses to continue to cut back on spending such as travel, entertainment, and restaurant meals,” Goldman Sachs Group Inc. economists led by Jan Hatzius said in a note to clients, adding that the slowdown could be classified as a recession. “Emerging supply-chain disruptions and the recent tightening in financial conditions will likely add to the growth hit.”
The risk of global recession has increased markedly in the face of economic stoppages. The Fed said it will keep interest rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
To support smooth functioning in the Treasury and mortgage-backed securities markets, as well as keep borrowing costs low, the Fed said it would lift its holdings of Treasury securities by at least $500 billion and of MBS by at least $200 billion.
“It certainly won’t avert recession, but I think they have taken bold action to mitigate the risks from financial tensions that could make the negative economic shock from Covid-19 far, far worse,” said ING Groep NV Chief International Economist James Knightley. “It is the right thing to do -- no reason to wait.”
Stocks have plunged as investors grapple with valuing companies whose earnings will suffer as economic activity slows sharply.
To contact the reporter on this story: Vince Golle in Washington at vgolle@bloomberg.net
To contact the editors responsible for this story: Scott Lanman at slanman@bloomberg.net, Jeff Kearns
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