U.S. Monetary Policy Eased Further on a Sunday Night

March 15, 2020

I had been struck by the rarity of the Fed’s 50-basis point interest rate cut on March 3 because officials acted then between scheduled policy meetings. An even rarer action has just occurred. Policy has been changed on a weekend, calling to mind former Fed Chairman Volcker’s, press conference on October 6, 1979, which marked the beginning of the end in the fight to quell double-digit U.S. inflation.

The Fed has undertaken a number of policy changes to promote the flow of cheap credit to businesses and households, and a press conference by Chairman Powell starts at 22:00 GMT.

  • The Fed funds target was reduced 100 basis points to 0.0-0.25%, matching its Great Recession low.
  • The primary discount window rate was slashed 150 basis points to 0.25%, eliminating any penalty on banks obtaining credit in that way.
  • Reserve requirements become zero percent on March 26.
  • A coordinated move with the Bank of England, Bank of Canada, Bank of Japan, ECB, and Swiss National Bank to ” to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points.”
  • The Fed over coming months will be increasing its holdings of Treasury securities by at least $500 billion and of mortage-backed securities by at least $200 billion.

Whether all this stabilizes financial markets is far from clear. The shock that triggered the instability, unlike the events of 2007-08, isn’t one of financial market dysfunctionality. It’s a blow to real economic demand and real economic supply that above all else demands trusty leadership from the public sector, very broad fiscal stimulus, and a speedy containment of the spreading coronavirus.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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