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United States Monetary Policy March 2020

United States: Fed slashes rates to Financial Crisis levels at second emergency meeting in March

In its second emergency meeting this month, the Federal Open Market Committee (FOMC) decided on 15 March to slash its benchmark rate by 100 basis points, bringing the target range for the federal funds rate to 0.00%–0.25%, a move last seen during the 2008 Financial Crisis. The FOMC’s emergency cut comes as the anticipated economic fallout from the coronavirus pandemic is looking increasingly severe. In the United States, travel, hospitality, and retail sectors are coming to a standstill, while manufacturers grapple with squeezed global supply chains and factory closures.

The Bank announced a series of measures alongside the rate cut designed to alleviate stressed financial conditions. The FOMC will increase its holdings of Treasury securities and mortgage-backed securities by at least USD 500 billion and USD 200 billion, respectively, a move reminiscent of the quantitative easing measures taken during the financial crisis. The Bank also rolled out a number of other policies including ramping up its overnight and term repurchase agreement operations. Meanwhile, a coordinated effort between the Fed and five other leading central banks will manage swap lines to reduce dollar funding pressures. The Bank’s latest round of stimulus follows a USD 1.2 trillion injection in short-term money markets on 12 March as liquidity conditions became increasingly tight in recent weeks.

Despite back-to-back rate cuts in March, Fed Chairman Jerome Powell stated in his teleconference that he does not foresee rates going negative, which has become the new norm in Europe and Japan. Instead, Powell alluded to the limited role that monetary policy has in mitigating the coronavirus and suggested that fiscal stimulus was a more appropriate tool to target the effects of the crisis, stating: “The thing that fiscal policy, and really only fiscal policy can do, is reach out directly to affected industries, affected workers”. Nevertheless, the press release stressed: “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses” and the FOMC will likely have to continue operations to smooth out market conditions in the short-term. 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.

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.”        

Steve Englander, head of global G10 FX research and North America macro strategy at Standard Chartered is skeptical the Bank’s measures will be able to stem the economic impact of the rampant coronavirus, explaining:

“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 scheduled meeting for 17–18 March was cancelled and the Committee is set to meet again until 28–29 April, unless a further deterioration in the economic situation prompts more emergency measures from the FOMC.

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