Sunday, March 15, 2020

Trump Gets What He Wants as Federal Reserve Interest Rate Target Drops to Zero

By Brian Doherty - March 15, 2020 at 07:55PM

The Federal Reserve announced Sunday afternoon that it will shift its target interest rate to the zero to 0.25 range, as well as launching a new shades-of-2008 phase of "quantitative easing"—injecting $700 billion of new money into the economy via buying financial assets.

The idea, along with their announcement earlier this week of over a trillion of rotating repo loans to financial institutions with a wide variety of bonds for collateral, is intended to keep the financial end of the economy rolling as other sectors are brought to a halt by COVID-19 safety measures.

A wide variety of financial instruments are being accepted at the discount window for such loans from the Fed, including everything from Treasury bonds to state and city obligations to commercial, industrial, and agricultural loans to corporate bonds to commercial real estate and consumer loans.

In addition, as CNBC reports:

The Fed also cut reserve requirement ratios for thousands of banks to zero [and] said the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank took action to enhance dollar liquidity around the world through existing dollar swap arrangements…The actions by the Fed appeared to be the largest single day set of moves the bank had ever taken…The quantitative easing will take the form of $500 billion of Treasurys and $200 billion of agency-backed mortgage securities. The Fed said the purchases will begin Monday with a $40 billion installment.

Yahoo! Finance gives some context, noting that:

the Fed said the financial institutions should feel comfortable tapping into the discount window as a tool for addressing "potential funding pressures." In the past, banks have been hesitant to tap into the direct lines of funding because of the stigma associated with relying on the Fed for emergency funds….The Fed also said firms could use their capital and liquidity buffers to lend, and reduced reserve requirement ratios to zero percent effective on March 26.

President Donald Trump had been jawboning and hectoring Fed chief Jerome Powell to make this drastic interest rate move for a long time to boost "his" economy in an election year.

But under current conditions, the move has a high risk of merely extending unnatural bubbles in certain asset values that will eventually crash, leaving monetary policy powerless to help. It has the additional risk of seeding high overall short-term price inflation of the sort we haven't seen in America in over three decades. The last time we've seen an annual price inflation rate over 5 percent, for example, was 1990.

The Fed says it will likely keep to these policies until it feels the economy is on the other end of the COVID-19 crisis.

 

 


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