The Federal Reserve slashes rates to near zero, eases bank lending rules
1 / 2Virus Outbreak EconomyFederal Reserve Chair Jerome Powell pauses during a news conference, Tuesday, March 3, 2020, while discussing an announcement from the Federal Open Market Committee, in Washington. In a surprise move, the Federal Reserve cut its benchmark interest rate by a sizable half-percentage point in an effort to support the economy in the face of the spreading coronavirus. Chairman Jerome Powell noted that the coronavirus"poses evolving risks to economic activity.
Some of the Fed's new steps are intended to free up money for banks to lend. As businesses across the country see their revenues dwindle as consumers stay home, they will seek short-term loans to maintain their payrolls. The Fed said it has dropped its normal requirement that banks hold cash equal to 10% of its customers' deposits, allowing banks to lend those funds. It also said banks can use additional cash buffers that were imposed after the 2008 financial crisis for lending.
All told, the Fed's actions amount to a recognition that the U.S. economy faces its most perilous juncture since the recession ended more than a decade ago. Posen advocates fiscal steps such as providing sick leave and pay for quarantined workers and rolling over bank loans to small and medium sized businesses hit hard by the outbreak.
Mnuchin also said he did not think the economy is yet in recession. Most economists, however, believe a recession is already here, or will be soon.. JPMorgan Chase predicts the economy will shrink 2% in the current quarter and 3% in the April-June quarter. Two weeks ago, in a surprise move, the Fed sought to offset the disease's drags on the economy by cutting its short-term rate by a half-percentage point — its first cut between policy meetings since the financial crisis. Its benchmark rate is now in a range of 1% to 1.25%. Some analysts have forecast that the Fed will reduce its rate by just one-half or three-quarters of a point on Wednesday, rather than by a full point.
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