Italians sing out from balconies during coronavirus lockdown
Italians sing out from balconies during coronavirus lockdown Image Credit: Agencies

Washington: Faced with a growing economic shutdown from the global new coronavirus pandemic, the US Federal Reserve on Sunday announced drastic emergency measures to shore up confidence and keep the financial sector running, including slashing the key interest rate to virtually zero.

The Fed made its second emergency rate cut in less than two weeks, cutting the benchmark borrowing rate to a range of 0-0.25 per cent, where it was during the 2008 global financial crisis, and pledged to keep it there “until it is confident that the economy has weathered recent events.”

The central bank also announced massive asset purchases, opened its discount lending windows to banks and urged them to use it to help businesses and households.

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In another move, it removed bank reserve requirements to allow them to use cash backstops.

Wall Street did not seem reassured by the Federal Reserve’s dramatic actions Sunday to contain the economic damage from the new coronavirus pandemic, falling sharply in trading ahead of Monday’s official open.

The Dow Jones Industrial Average “mini” index lost 1,000 points or 4.5 per cent in futures trading.

The broad based S&P 500 mini index and tech-dominated NSADAQ each dropped more than 4.5 per cent.

President Donald Trump, who has been critical of the independent Fed for not acting more aggressively, praised the moves.

“What’s happened with the Fed is phenomenal news,” Trump said at a regular briefing of his coronavirus task force.

“It’s a tremendous thing that took place just now,” he said. “I can tell you, I’m very happy. I didn’t expect this. And I like being surprised.”

In addition, the Fed joined forces with other major central banks to guarantee the global financial system has enough cash to continue to operate. The action was coordinated with the European Central Bank, Bank of England, Bank of Japan, Bank of Canada and the Swiss National Bank.

“The swap lines are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets,” a statement said.

The massive show of financial force as more countries are on lockdown due to the spread of the COVID-19 illness aims to contain the economic fallout as businesses are forced to shut their doors, in an already sluggish global economy.

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed’s policy-setting Federal Open Market Committee said in the statement following the emergency meeting.

It said it “will use its tools and act as appropriate to support the economy,” though what tools it has left is a question.

One FOMC member dissented from the vote. Cleveland Fed President Loretta Mester objected only to the move to take the federal funds rate nearly to zero.