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Monday, July 26, 2021

Rates Cut to Zero, Fed Launches $700-B QE Program

Sunday, the Fed took emergency action to help the economy withstand the coronavirus by slashing its benchmark interest rate to near Zero and saying it would buy $700-B in Treasury and mortgage bonds.

The surprise announcement signaled its concern that the viral outbreak will depress economic growth in the coming months and that it is prepared to do whatever is needed counter the risks.

It said it would keep its key rate at a range between Zero and 0.25% until it feels confident that the economy can survive what has become a sudden near-shutdown of economic activity in the United States.

It will buy $500-B of Treasury securities and $200-B of mortgage-backed securities in an effort to smooth over market disruptions that have made it hard for banks and large investors to sell Treasuries as well as to keep longer-term rates borrowing rates down.

By aggressively slashing its benchmark short-term rate to near Zero and pumping hundreds of billions of dollars into the financial system, the Fed’s move Sunday recalled the emergency action it took at the height of the financial crisis. Starting in Y 2008, the Fed cut its Key rate to near Zero and kept it there for 7 years. It has now returned that rate to its record-low level.

Saturday, President Trump reiterated his demand that the Fed “get on board and do what they should do,” arguing that benchmark US rates should be as low as they are in Europe and Japan, where they are now negative.

Stay tuned…

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