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United States Monetary Policy March 2020

United States: Fed slashes rates at second emergency meeting in March; unveils unprecedented range of measures to address liquidity strains

In its second emergency meeting this month on 15 March, the Federal Open Market Committee (FOMC) slashed its benchmark rate by 100 basis points, bringing the target range for the federal funds rate to its effective floor of 0.00%–0.25%, a move last seen during the 2008 Global Financial Crisis. The FOMC’s emergency cut comes as the anticipated economic fallout from the coronavirus pandemic is looking increasingly severe. Moreover, in the days following the Fed’s rate cut, the Bank has taken an unprecedented range of additional measures to alleviate strained financial conditions and illiquidity during the virus-induced downturn, stressing that “aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”

On 23 March, the FOMC announced it would expand its balance sheet expansion program, and has been purchasing USD 75 billion in Treasury securities and USD 50 billion in mortgage-backed securities daily. Chairman Jay Powell also emphasized there would be no cap to how many purchases the Fed would make, but would purchase as much as needed to restore liquidity. Moreover, the Fed has activated several facilities to support roughly USD 300 billion worth of credit via a special back-stop in the commercial paper market; providing overnight and term funding with 90-day maturities; helping large employers through bridge financing; and backing purchases of corporate bonds from U.S. companies with investment grade rating among other credit instruments. The Bank’s latest round of stimulus follows a USD 1.2 trillion injection in short-term money markets on 12 March.

Meanwhile, the Bank has temporarily expanded its dollar swap lines to nine additional central banks at a total of USD 450 billion, in tandem with its standing swap lines with the Bank of Canada, the Bank of England, the Bank of Japan, the ECB, and the Swiss National Bank. These coordinated efforts are designed to reduce the tight supply of dollars, as governments and companies abroad struggle to finance dollar-denominated debt.

The Federal Reserve also plans to roll out a Main Street Business Lending Program to supply credit to small- and medium-sized businesses, which would complement fiscal policies to provide assistance to the Small Business Administration to extend credit to smaller American establishments.

In the accompanying press release the Committee stressed: “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses”. Consequently, the Fed is likely to maintain the target range at its current level until the contagion from the virus is contained and the economic fallout has subsided and will have to continue ongoing operations in the short-term to smooth out rough market conditions.

Commenting on the Fed’s rate cut, analysts at UniCredit noted:

“In doing so, the Fed has done what it can within its remit and policy toolkit to support aggregate demand and, in particular, the availability of credit and liquidity. Fed Chair Jerome Powell acknowledged that the measures are unlikely to prevent the US economy from taking a large hit from the virus in 2Q20, and beyond if the virus is not contained by then. […] We continue to expect the Fed to keep the zero lower bound for rates at least through 2021.”        

However, economists are skeptical that the Bank’s measures will be able to stem the substantial economic damage caused by the fast-spreading pandemic. As Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered, explained:

“The Fed measures make it easy for depository institutions to access very cheap credit, but it is unclear how much this credit easing will extend to corporates and households. […] We suspect that more generous measures are needed to help the private sector ride out the impact of the disease. Fed Chair Powell indicated at the press conference that fiscal policy should take the lead on further stimulus.”

The Fed’s next scheduled meeting is set for 28–29 April, unless a further deterioration in the economic situation prompts more emergency measures from the Committee.

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