Federal Reserve Emergency Rate Cut To Zero in Coordinated Global Central Bank Action

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Helmholtz Watson
Participant

The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations to ensure that the supply of reserves remains ample and to support the smooth functioning of short-term U.S. dollar funding markets. In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 0.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and to reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.

The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”

The vote also encompassed approval of the statement below for release at 5:00 p.m.:

“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. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. 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.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.

The Committee will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures, and will use its tools and act as appropriate to support the economy. In determining the timing and size of future adjustments to the stance of monetary policy, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

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. 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. The Committee will also reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Open Market Desk has recently expanded its overnight and term repurchase agreement operations. The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate.”

Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, and Randal K. Quarles.

Voting against this action: Loretta J. Mester

President Mester was fully supportive of all of the actions taken to promote the smooth functioning of markets and the flow of credit to households and businesses but voted against the FOMC action because she preferred to reduce the target range for the federal funds rate to 1/2 to 3/4 percent at this meeting.

Consistent with the Committee’s decision to lower the target range for the federal funds rate to 0 to 1/4 percent, the Board of Governors voted unanimously to lower the interest rate paid on required and excess reserve balances to 0.10 percent and voted unanimously to approve a 1-1/2 percentage point decrease in the primary credit rate to 0.25 percent, effective March 16, 2020.

The Board also approved changes to allow Reserve Banks to extend primary credit loans for as long as 90 days and that could be prepaid or renewed on request. In addition, the Board approved a reduction in reserve requirement ratios applicable to net transaction deposits above the exemption threshold to 0 percent effective with the reserve maintenance period beginning on March 26, 2020.

It was agreed that the next meeting of the Committee would be held on Tuesday–Wednesday, April 28–29, 2020. The meeting adjourned at 2:40 p.m. on March 15, 2020.

Notation Vote
By notation vote completed on February 18, 2020, the Committee unanimously approved the minutes of the Committee meeting held on January 28–29, 2020.

Videoconference meeting of March 2
A joint meeting of the Federal Open Market Committee and the Board of Governors was held by videoconference on March 2, 2020, at 7:30 p.m. to review developments related to the outbreak of the coronavirus and discuss steps that could be taken to provide support to the economy. As background for the Committee’s discussion, the staff reviewed recent developments in financial markets and provided an assessment of the evolving risks to the economic outlook.

The SOMA manager noted that since mid-February when concerns about the spread of the coronavirus beyond China had begun to intensify, global risk asset prices and sovereign yields had declined sharply. U.S. and global equity indexes were lower than at the time of the Committee’s meeting in January and implied equity market volatility had risen to levels not seen since 2015. The deterioration in risk sentiment had also been reflected in a significant widening in U.S. and European corporate credit spreads and in peripheral European spreads. Amid the ongoing market volatility, issuance of investment-grade and high-yield corporate bonds and of leveraged loans had generally dried up. Money markets had been resilient during the broader financial market volatility; pricing and trading conditions in offshore U.S. dollar funding markets had also been stable. Market functioning had remained orderly despite deterioration in liquidity conditions in Treasury, equity, and credit markets.

Financial market participants’ views on the likely course of U.S. monetary policy had changed since the Committee’s January meeting. The expected path of the federal funds rate embedded in futures prices had shifted down significantly over the period. Market commentary had interpreted Chair Powell’s February 28 statement as indicating the FOMC was prepared to lower the target range for the federal funds rate at or before the March meeting to support the achievement of the Committee’s maximum employment and price stability goals. Expectations for global monetary and fiscal easing had increased, with some market commentary noting the possibility of a coordinated effort across central banks or fiscal authorities.

The SOMA manager noted that the situation remained highly fluid with key risks, including those associated with funding for corporate borrowers, operational vulnerabilities associated with the transition to alternative work arrangements, and the potential for impaired market functioning.

The staff then provided an update on current conditions and changes to the economic outlook since the FOMC’s January meeting. Available indicators for China suggested that the spread of the coronavirus had been associated with a collapse in economic activity during the first quarter, with spillovers to the global economy from the drop in Chinese demand and disruption of supply chains. Although there were some tentative signs that the coronavirus in China was being contained and production was beginning to resume, the outbreak of the virus in other foreign economies was weighing on consumer and business sentiment and depressing consumption in those countries. All told, foreign economic activity was expected to be significantly weaker during the first half of 2020 than the staff had anticipated at the time of the January FOMC meeting.

The staff noted that the spread of the virus was at an earlier stage in the United States and its effects were not yet visible in monthly economic indicators, although there had been some softening in daily sentiment indexes and travel-related transactions. The outlook for real economic activity over the remainder of the year was highly uncertain and depended on the spread of the virus and the measures taken to contain it. Scenarios involving a greater spread of the coronavirus and more severe social-distancing actions would be associated with a greater shutdown of production and disruption of supply chains, larger negative effects on consumer and business sentiment, more significant increases in unemployment, and worsening financial conditions. Reductions in demand, coupled with a stronger U.S. dollar and weaker commodity prices, were expected to put downward pressure on inflation, with the magnitude of the softening in core inflation depending on the severity of the situation.

FOMC participants discussed the significant outbreaks of the coronavirus that had emerged recently in a few countries outside China and the likelihood that the virus would spread widely around the world, including in the United States. While the economic outlook at the time of the Committee’s January meeting had been favorable, the potential spread of the virus and the measures needed to protect communities from it represented a material downside risk to the U.S. economy. A forceful monetary policy action could provide a clear signal to the public that policymakers recognized the potential economic significance of the situation and were willing to move decisively to support the achievement of the Committee’s dual mandate goals and counter the recent tightening of financial conditions. Although a reduction in the policy rate would not slow the spread of infection or remedy broken supply chains, it could help shore up the confidence of households, businesses, and financial markets; ease financial strains of consumers and firms; and provide meaningful support to the economy in the face of a large shock to demand. Accordingly, participants supported a reduction of 50 basis points in the target range for the federal funds rate.

On March 3, 2020, the Committee completed the vote to authorize and direct the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive:

“Effective March 4, 2020, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1-1/4 percent. In light of recent and expected increases in the Federal Reserve’s non-reserve liabilities, the Committee directs the Desk to continue purchasing Treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. The Committee also directs the Desk to continue conducting term and overnight repurchase agreement operations at least through April 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. In addition, the Committee directs the Desk to conduct overnight reverse repurchase operations (and reverse repurchase operations with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 percent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

The Committee directs the Desk to continue rolling over at auction all principal payments from the Federal Reserve’s holdings of Treasury securities and to continue reinvesting all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities received during each calendar month. Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.

The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve’s agency mortgage-backed securities transactions.”

The vote also encompassed approval of the statement below for release at 10:00 a.m. on March 3, 2020:

“The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1-1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

Voting for this action: Jerome H. Powell, John C. Williams, Michelle W. Bowman, Lael Brainard, Richard H. Clarida, Patrick Harker, Robert S. Kaplan, Neel Kashkari, Loretta J. Mester, and Randal K. Quarles.

Consistent with the Committee’s decision to lower the target range for the federal funds rate to 1 to 1-1/4 percent, the Board of Governors completed on March 3, 2020, unanimous votes to lower the interest rate paid on required and excess reserve balances to 1.10 percent and to approve a 1/2 percentage point decrease in the primary credit rate to 1.75 percent, effective March 4, 2020.

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James A. Clouse
Secretary