WASHINGTON (Reuters) – The U.S. Federal Reserve and global central banks moved aggressively on Sunday to buttress a world economy unraveling rapidly amid the coronavirus pandemic, with the Fed slashing interest rates to near zero, pledging hundreds of billions of dollars in asset purchases and backstopping foreign authorities with the offer of cheap dollar financing.
The coordinated global actions were reminiscent of the sweeping steps taken just over a decade ago to fight a meltdown of the global financial system, but this time the target was an entirely unfamiliar foe – a fast-spreading health crisis with no certain end in sight that is forcing entire societies to effectively shut down.
In a news conference Federal Reserve chairman Jerome Powell said the epidemic was having a “profound” impact on the economy, forcing whole industries like travel and leisure offline. Yet the ultimate spread of the virus is so uncertain, Powell said, the Fed called off quarterly economic forecasts due this week as a futile exercise until it is clear how many people will get sick, and how long public gatherings will need to be discouraged in the name of public health.
“The economic outlook is evolving on a daily basis and it is depending on the spread of the virus … That is not something that is knowable,” Powell said at the end of an emergency Fed meeting held in place of the Fed’s regular meeting this week.
Given the depth and uncertainty of the risks, Powell said the Fed and other central banks were acting to ensure that financial markets keep functioning around the world, and trying to limit the chance that companies, households or financial institutions are dragged down by any slump in business.
To that end the Fed included dramatic moves to keep credit flowing to businesses and families, encouraging banks to tap trillions of dollars in equity and liquid assets built up as capital buffers since the financial crisis to support people whose lives may be upended by the virus.
“The virus is having a profound effect on people across the United States and around the world,” Fed Chair Jerome Powell said in a news conference after cutting short-term rates to a target range of 0% to 0.25%, and announcing at least $700 billion in Treasuries and mortgage-backed securities purchases in coming weeks.
“We really are going to use our tools to do what we need to do here,” Powell said, adding that the Fed has gone in “strong” and could increase bond-buying and use other tools to support market functioning and the flow of credit, what he called the Fed’s “most important” function.
A broader set of Fed powers, including direct lending to financial firms, remains at the Fed’s disposal, and Powell said the central bank would not hesitate to use them if needed.
“He sounded like (former ECB President Mario) Draghi saying he will do what it takes, and we believe him,” Andrew Brenner, head of international fixed income at National Alliance Securities, wrote in an email to clients. Draghi, who stepped down as head of the ECB last year, famously pledged in 2012 to “do whatever it takes” to combat a crisis then threatening to tear the monetary union apart, a bold declaration that is broadly credited with saving the euro.