The US Federal Reserve on Sunday cut interest rates to zero. The Fed’s hugely surprising move comes as the world fights to prevent further damage from the rapidly-spreading coronavirus.
The move unleashes a massive $700 billion quantitative easing by the central bank of the world’s largest economy.
“. . .The Committee seeks to foster maximum employment and price stability. The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to ¼%," the Federal Open Market Committee (FOMC) said in a release posted on its website.
The FOMC said it expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
This is the second time in as many weeks the US Fed has cut interest rates as the deadly virus threatens to cause massive disruption to the world economy. The disease (COVID-19) has so far claimed 6,605 lives and spread to 146 countries.
The first and last time interest rate were zero in the US was in December 2008 at the peak of the global financial crisis.
The Fed announced several other measures to support the credit needs of households and businesses. They include US dollar liquidity swap line arrangements and coordinated action with The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank.
Swap lines suggest how the Fed is alarmed by the rise in the value of the greenback against the major currencies of the world. It aims to increase the dollar liquidity to prevent it from strengthening further.
In India, after this rare action by the Fed to move interest rates to zero, all eyes will be on the Reserve Bank of India (RBI). The Monetary Policy Committee (MPC) of India’s central bank will meet 2-4 April to decide on interest rates. India’s repo rate, the benchmark interest rate at which RBI lends to commercial banks, is 5.15%.
With still two weeks to go for the next policy meet, the market players will expect RBI to act. While the central bank has been intervening in the forex markets to arrest the slide of the rupee, it can’t be said if its MPC would meet ahead of 2 April and cut interest rates.
According to data available on Johns Hopkins website, there are 162,687 cases of coronavirus-affected patients in the world. Of the 6,065 deaths, 3,085 have occurred in China and 1,441 in Italy. In India, two people have died while 113 have been affected.