WASHINGTON — With the fast-spreading coronavirus posing a dire threat to economic growth, the Federal Reserve on Sunday night took the dramatic step of slashing interest rates to near-zero and unveiled a sweeping set of programs in an effort to backstop the United States economy.
In addition to cutting its benchmark interest rate by a full percentage point, returning it to a range of 0 to 0.25 percent, the Fed said it would inject huge amounts of money into the economy by snapping up at least $500 billion of Treasury securities and at least $200 billion of mortgage-backed debt “over coming months.”
The remarkable Sunday afternoon action — reminiscent of the global financial crisis a dozen years ago — reflected the imminent peril facing the economy from a virus that has shuttered factories, quarantined workers and made a recession look increasingly likely. To try to contain the damage, the U.S. central bank engaged a significant amount of its firepower, deploying multiple tools across several areas of policy.
As workers are forced to stay home, restaurant and movie traffic slows and entire cities grind to a halt, the economy is certain to endure short-term pain. Officials are trying to prevent those near-term disruptions from forcing businesses to default on loans or close permanently, inflicting long-term damage. They are also working to make sure that the inner workings of financial markets function smoothly at a time of intense volatility.
“The virus presents significant economic challenges,” Fed Chair Jerome H. Powell said in a news conference on Sunday evening. In the past week, he said, “several important financial markets” have “shown signs of stress,” pointing specifically to the Treasury market.
He said that the Fed’s purchases of government bonds and mortgage-backed debt will help to support functioning in those markets, which form a crucial backbone for the rest of the financial system.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the central bank said in a statement on Sunday. “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.”
President Trump praised the Fed’s action. “I want to congratulate the Federal Reserve,” he said on Sunday night. “People in the market should be very thrilled.” Mr. Trump added, “We got it down to potentially zero.”
The move was not unanimous. Loretta Mester, president of the Federal Reserve Bank of Cleveland, voted against it, preferring to lower interest rates by only half a percentage point.
The Fed encouraged banks to use its discount window, which provides ready access to financing, and said it was “encouraging banks to use their capital and liquidity buffers as they lend to households and businesses.” The Fed also eliminated bank reserve requirements — which mandate that banks stash a certain amount of cash at the central bank — a suite of efforts meant to free up cash for the banks to keep lending.
The central bank also announced that the Fed, along with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank would lower the pricing on the standing U.S. dollar liquidity swap arrangements and take other measures to encourage their use and effectiveness — an effort to keep dollar funding flowing globally.
The Fed has a history of using “swap lines” to help foreign central banks deliver U.S. dollar funding to financial institutions in their regions amid market stress. Such agreements were used extensively during the financial crisis.
The Fed’s new bond-buying program is slightly larger than the one announced in November 2008 — the first step into what would become the first round of the central bank’s crisis-era effort known as quantitative easing. That program ultimately pumped trillions of dollars into the economy in an attempt to lower longer-term interest rates and reinvigorate growth during and after the recession.
Mr. Powell and his Fed colleagues have been the first line of defense against the economic fallout from coronavirus. They slashed interest rates by half a percentage point at an emergency meeting on March 3, and have rolled out a number of initiatives to keep markets flush with cash and chugging along.
“They really went to extremes here to find as many ways as possible to ease credit,” said Michael Feroli, chief U.S. economist at J.P. Morgan. “They’re trying to do all they can do — and do it quick, do it now.”
While the cuts leave the Fed back near zero, meaning the central bank has exhausted perhaps its most powerful recession-fighting tool, economists believe that moving aggressively and early to stave off a downturn is the best prescription when interest rates are low to start with.
That’s just what the Fed did. “We know that there was going to be a day when the Fed was going to be constrained again,” Mr. Feroli said. “This is that day.”
In a sign of how urgent the Fed considered Sunday’s moves, Mr. Powell said the Federal Open Market Committee would no longer hold its previously planned meeting scheduled for March 17 and 18, saying this decision was “in lieu” of that meeting.
Mr. Powell did not use the “recession” word but said he expected the second quarter of U.S. economic growth to be “weak.”
After that, he said, “it’s very hard to say how big the effects will be or how long they will last. That’s going to depend on how widely the virus spreads” he said, adding the answer to that is “unknowable.”