Fed makes record-setting interest adjustment

Central banks around the world adopting “do whatever it takes” approach as coronavirus fear wobbles economies

Fed makes record-setting interest adjustment


By Madison Utley

The Federal Reserve in the United States has taken drastic action and implemented an emergency interest rate cut down to 0%, joining the growing ranks of central banks around the world instituting atypical measures to rescue their struggling markets.

This morning, 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 co-ordinated global action to enhance the provision of liquidity via the standing US dollar liquidity swap line, attempting to ensure there are sufficient dollar reserves on hand moving forward. 

The call to slash the rate in the US is intended to make borrowing as cheap and accessible as possible for households and businesses in order to stimulate economic activity despite the oppressive impact the spread of COVID-19 is having on domestic and global markets.

Now, the benchmark US interest rate ranges from 0% to 0.25% as compared to the 1.0% to 1.25% range it has hovered around for the last several years. The Federal Reserve expects to maintain the low interest rates until the US economy recovers from COVID-19’s hold. 

The Federal Reserve also announced it will again implement quantitative easing, as it did following the Global Financial Crisis; it plans to purchase at least $700bn in bonds, with $200bn of that in mortgage-backed securities.

This morning, New Zealand took similar action to the Federal Reserve. Following an emergency reserve bank meeting (RBNZ) held yesterday, the cash rate was today slashed from 1.0% to 0.25%. According to the RBNZ, it will likely remain there for at least the next year. Further, it signalled it too would resort to quantitative easing in an attempt to stimulate the domestic economy.

The central banks in England and Canada also cut interest rates in the last week, while other countries throughout the world are resorting to other action, injecting billions into their economies, boosting the supply of credit made available and otherwise attempting to stimulate their markets.

Earlier this month, the Reserve Bank of Australia (RBA) cut its central rate to a new record low of 0.50%. According to CommSec research, financial market economists are in agreement that the RBA will cut the rate yet further to 0.25% at or before the April 7 meeting.

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