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Fed Chops Interest Rates Down to Zero in Epic Fight Against Coronavirus

Doug Whiteman
Fed Chops Interest Rates Down to Zero in Epic Fight Against Coronavirus

In rare action on a Sunday, the Federal Reserve has announced it's pushing a key interest rate down to near zero to help protect the economy from the growing coronavirus threat.

"The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States," the Fed said in a statement. "Global financial conditions have also been significantly affected."

The central bank has been acting with increasing urgency in response to the rapidly spreading virus and the disease it causes, COVID-19. The new emergency action comes less than two weeks after Fed policymakers cut their benchmark rate by one-half of one percentage point, in another surprise move.

The Fed could have chosen to wait until its regular meeting scheduled for later this week, on March 17 and 18, but apparently determined that the coronavirus required immediate measures to keep the economy steady.

The Federal Reserve is hoping to encourage businesses and consumers to borrow and spend during a time when financial markets are crashing, institutions including Broadway theaters and Disneyland are shutting down, travel is being curtailed, schools and universities are closing, and workers are being furloughed.

The Fed's rate has returned to an all-time low

Fed policymakers announced Sunday that they decided to lower the federal funds rate — the influential short-term interest rate that the central bank controls — to a range of 0% to 0.25%, from the previous range of 1% to 1.25%.

The rate's new level ties the all-time low set during the financial crisis in 2008. At that time, the Fed dropped its rate to zero — and kept it there for seven years.

Banks use the federal funds rate to set the prime rate, the interest rate they charge their best customers. Since the Fed cut its rate by one full percentage point, banks are likely to do the same with the prime, meaning we're likely to see it fall from 4.25% to 3.25%.

That will could have big benefits for consumers, because many other rates are tied to the prime, including credit card interest rates, rates on adjustable-rate mortgages, and the rates on home equity lines or credit, or HELOCs.

Fed rate cuts also indirectly influence the movement of other interest rates throughout the economy, like mortgage rates — which already have hit record lows — and the rates on personal loans.

Other new action by the Fed

Paul Brady Photography / Shutterstock

In addition to cutting the federal funds rate to the bone, the Fed has gone back to buying up bonds — another of the maneuvers it used to nurse the economy back to health after the Great Recession.

The central bank says it will purchase $500 billion in Treasury bonds and $200 billion in mortgage-backed securities to help bring down long-term interest rates for businesses and consumers.

And, policymakers are slashing the Fed's “discount window” rate, which is the interest it charges banks for short-term loans, by one and a half percentage points: from 1.75% to just 0.25%.

"The Federal Reserve 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," the Fed's statement said.

Altogether, the actions show that the "Fed is wide awake at the wheel," says Diane Swonk, chief economist for the accounting giant Grant Thornton.

"The @federalreserve can’t stop the worst from happening," Swonk said on Twitter, noting that America is primarily dealing with a health crisis. "They can only help us to better weather the storm and contain damages so that we have a chance of emerging on the other side."