US cuts interest rate to nil, unveils $700-bn QE programme

17 Mar '20

2 min read

Pic: Shutterstock

The US Federal Reserve (Fed) recently cut its key interest rate to virtually zero and launched a $700-billion quantitative easing (QE) programme. It announced drastic emergency measures to reinforce confidence and keep the financial sector running following the COVID-19 outbreak. The Fed's March 15 move is its second emergency rate cut in less than two weeks.

The central bank also slashed the rate of emergency lending at the discount window for banks by 125 basis points to 0.25 per cent, and lengthened the term of loans to 90 days. In another move, it removed bank reserve requirements to allow them to use cash backstops.

The benchmark borrowing rate is now at levels similar to that during the 2008 global financial crisis. It pledged to keep it there "until it is confident that the economy has weathered recent events."

The action, coordinated with the European Central Bank, Bank of England, Bank of Japan, Bank of Canada and the Swiss National Bank, was praised by President Donald Trump, who has been critical of the Fed for not acting more aggressively, according to US media reports.

Federal Reserve Chairman Jerome Powell said the Fed would be patient before lifting rates again.

The quantitative easing will take the form of $500 billion of Treasury’s and $200 billion of agency-backed mortgage securities. The Fed policy-setting Federal Open Market Committee said in the statement that the purchases will begin March 16 with a $40 billion instalment.

The Fed added in its statement that it “is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”

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