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Federal Reserve Cuts Interest Rates To Zero For First Time Since Financial Crisis

Federal Reserve Cuts Interest Rates To Zero For First Time Since Financial Crisis

In an emergency move Sunday afternoon, the U.S. Federal Reserve announced it has cut interest rates to zero to 0.25%, the first time interest rates have been that low since the 2008-2009 financial crisis.

"The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing," the Fed said in a statement.

"Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12‑month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation have declined; survey-based measures of longer-term inflation expectations are little changed."

The Fed had been scheduled to meet March 17 and 18.

See Also: Would An Interest Rate Cut Calm The Stock Market?

Since the Federal Open Market Committee met in January, the Fed said new data indicates the labor market remained strong through February and economic activity rose at a moderate rate.

On Thursday, the Fed announced a new program to provide up to $1.5 trillion in short-term loans to support financial market liquidity.

On Sunday, the Fed said "to support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion."

See Also: After Worst Week Since 2008, What's Next For The Stock Market?

Is It Enough?

In an op-ed for The Wall Street Journal earlier this week, John Greenwood, chief economist at Invesco, and Steve Hanke, professor of applied economics at the Johns Hopkins University, said the U.S. economy was perfectly healthy prior to the outbreak. Therefore, it needs liquidity much more than it needs stimulus via rate cuts.

“The Fed needs to supply liquidity to deal with the panic—whether by quantitative-easing purchases of long bonds, by Treasury bill purchases, by repos or, most important, by increasing the amounts of U.S. dollar swaps available to the central banks of Japan, China, South Korea, Taiwan and Hong Kong,” Hanke and Greenwood wrote.


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