The Federal Reserve’s unexpected rate cut has prompted banks across the US to cut their prime lending rates.
The Fed yesterday announced a cut of 50 basis points to its target range for the federal funds rate to 1-1.25%, from 1.5-1.75% previously, in response to the economic risks posed by the spread of COVID-19, the disease caused by coronavirus.
It is the lowest the Fed’s central interest rate has been since 2017 and the first emergency meeting of the Federal Open Market Committee (FOMC) outside of its scheduled meetings since October 2008 at the height of the global financial crisis.
In a statement, the FOMC said: “The fundamentals of the US economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate.
“The committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”
The move had unanimous support from the FOMC’s 10 members.
In addition, the Federal Reserve will continue its asset purchase program “at least into the second quarter of 2020”, the central bank said, to maintain the size of its balance sheet at or above the level it was at in September last year.
“Principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in Treasury securities to roughly match the maturity composition of Treasury securities outstanding,” the Fed stated. “Principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities.”
In response to the announcement, 18 banks published statements confirming a reduction to their prime lending and reference lending rates from 4.75% to 4.25%, taking effect from today.
In a separate statement, the G7’s group of finance ministers and central bank governors – including representatives from Canada, France, Germany, Italy, Japan, the UK and the US – said it was “closely monitoring” the situation.
“Given the potential impacts of COVID-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks,” the G7 said.
“Alongside strengthening efforts to expand health services, G7 finance ministers are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase.
“G7 central banks will continue to fulfill their mandates, thus supporting price stability and economic growth while maintaining the resilience of the financial system.
The statement also welcomed pledges from the International Monetary Fund, the World Bank, and other international financial institutions that have all promised to “help member countries address the human tragedy and economic challenge posed by COVID-19 through the use of their available instruments to the fullest extent possible”.
Elsewhere, the European Central Bank (ECB) has restricted all non-essential travel for its employees in response to the COVID-19 outbreak, which has affected 28 countries across Europe. It has also closed its visitor center at its headquarters in Brussels, Belgium, and cancelled or postponed conferences until April 20.
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