Federal Reserve slashes interest rates, eases banking rules

The Federal Reserve took the unprecedented step Sunday of cutting interest rates to zero and launching a massive emergency $700 billion quantitative easing program to protect the economy from the impact of the coronavirus, while Treasury Secretary Steven T. Mnuchin and House Speaker Nancy Pelosi began work on a third relief bill to help U.S. businesses and workers.

As restaurants, taverns, schools and some major companies closed across the country, the Fed announced it was lowering its prime lending rate to 0% to 0.25%, the second major cut in two weeks.

Combined with the new easing program, it was the largest one-day action the central bank has ever taken.

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the central bank said in a statement. “The Committee 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.”

President Trump said the move was “really good news.”

“It’s really great for our country,” the president told reporters at the White House. “I think people in the [stock] market should be very thrilled.”

Still, stock futures fell Sunday after the Fed’s action, indicating more losses loom on Monday.

Major stock indexes have plummeted more than 20% in the past two weeks from their highs in mid-February, largely on concerns about the economic impact of the virus. Stocks bounced back nearly 10% on Friday, bolstered by Mr. Trump’s announcement of a national emergency and steps to speed testing and aid to states.

The dramatic action by the Fed emphasized the threat to the U.S. economy from the coronavirus outbreak. The central bank had just reduced the prime lending rate by 0.5% two weeks ago, and last week it injected $1.5 trillion into the bond market. The rate is a benchmark for short-term lending for financial institutions and is a guide to many consumer rates from car loans to mortgages.

Reserve requirements at banks also were eased, and the Fed said it is coordinating with foreign banks to enhance dollar liquidity in Japan, Britain, Europe, Canada and Switzerland.

Mr. Trump had been imploring the Fed to cut rates further to keep the U.S. economy competitive with other nations whose central banks have been cutting their rates deeper.

In the coming months, the Fed said it will purchase at least $700 billion more in bonds as part of its new quantitative easing to ensure enough money in the economy. The majority of it, about $500 billion, will be U.S. Treasury bonds. The rest will be mortgage-backed securities.

“The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals,” the Fed said in a statement.

Mr. Mnuchin and Mrs. Pelosi are already talking about a third coronavirus bill, even as their second bipartisan legislative response to the outbreak awaits action in the Senate.

The next package will be a stimulus bill targeting small and medium-sized businesses as well as specific industries that have been hit hard by the virus, the secretary explained.

“We will use whatever tools we have and whatever tools we don’t have we will go to Congress on a bipartisan basis and get more tools,” Mr. Mnuchin said. “We’re in the second inning of nine innings.”

Its predecessor, however, still needs to get to the president’s desk.

After a feverish 48 hours of negotiations, the House passed a massive relief package to alleviate the pressure on families and hourly workers just after midnight on Saturday.

It mandated free testing for the coronavirus, funds more unemployment-insurance programs and pays for sick leave for those that contract the virus or need to care for someone who does if they’re at a company with less than 500 employees.

The bill also shores up food programs for vulnerable communities, like the elderly and schoolchildren, and bolsters state Medicaid programs so health providers can handle an influx of patients.

“This bill was very important in getting workers money in their pockets, people that have to be home,” Mr. Mnuchin said on ABC’s “This Week.”

To help small businesses, the Treasury Department announced that those companies will be able to get deposits they gave the IRS and get a cash advance from the agency.

This came just about a week after Congress passed a bipartisan $8.3 billion bill to get more resources to state and local health officials.

And on Friday, President Trump declared a national emergency, freeing up about $50 billion in aid for states and localities to combat the virus.

“I think there’s a lot of bipartisan support. We hope they pass this bill. If not, we’ll work with the center on whatever minor changes we need,” Mr. Mnuchin said on Fox News.

The Senate, which left for the weekend on Thursday as plans for quick passage in the House fell apart, will be in on Monday, which will be the soonest the chamber could vote on the bill depending on what, if any, changes are made.

At least one senator, though, is suggesting that the Senate doesn’t come back in at all this week.

On Sunday, Senate Majority Whip Richard J. Durbin, Illinois Democrat, called for the chamber to stay on recess and pass the bill on a unanimous consent vote — which can be derailed by just one objection — and allow those who object have it noted in the official record.

He argued that doing otherwise would put senators and their staffers at risk of catching the virus unnecessarily.

“We have been warned to limit unnecessary travel and gathering in large groups. Senators and staff are working to serve their states locally as best they can, and with unanimous consent for these measures there is no valid reason to force extra travel this week,” he said in a statement.

However, the fact that lawmakers passed this latest legislative fix without a price tag, made it nearly impossible to push through the Senate on a unanimous basis.

The chamber also needs to pass a bill to reauthorize and reform the Foreign Intelligence Surveillance Act, parts of which expired Sunday.

Both Mr. Mnuchin and Mrs. Pelosi said they will start working on the next package this week. The secretary wants the bill to specifically help sectors like the airline, tourism and cruise industries.

Mr. Mnuchin defended the strategy, saying it wasn’t like the auto and banking bailouts that were spurred by the recession in the early 2000’s.

“If you’re providing liquidity to good businesses that just need liquidity for three to six months where you’re taking collateral and you have security, that’s not a bailout,” he said on Fox News. “To the extent that we need to support different businesses that are impacted — again, our focus is going to be on stimulus for the workers and getting money to the workers that impacted.”

The total cost of the bailouts from the financial crisis of 2008-09 was $498 billion, according to an analysis last year by Deborah J. Lucas, director of the Massachusetts Institute of Technology’s Golub Center for Finance and Policy.

Mr. Trump has repeated floated a payroll tax as another means to help alleviate some of the economic fallout of the virus, but it’s failed to capture any enthusiasm from anyone on Capitol Hill, least of all Democratic leadership.

The Fed had been scheduled to hold a Federal Open Market Committee meeting on March 17-18.

In Sunday’s action, the central bank also slashed the rate of emergency lending at the discount window for banks by 125 basis points, to 0.25%, and lengthened loan terms to 90 days.

The Fed said the purchases under its new quantitive easing would begin Monday with a $40 billion installment.

The Fed’s action cuts rates to a new range of 0% to 0.25%, from 1% to 1.25%. Cleveland Fed President Loretta Mester was the only “no” vote, preferring to set rates at 0.5% to 0.75%.