US Federal Reserve Cuts Interest Rate to Zero for First Time in 5 Years with 1%p 'Big Cut' (Comprehensive)

$700 Billion Bond Purchases Also Underway
Major Central Banks Cooperate on Dollar Swap
Chairman Powell: "COVID-19 Has Serious Impact on Economy"

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. Federal Reserve (Fed) took an unprecedented strong measure by slashing the benchmark interest rate by 100 basis points (1bp=0.01 percentage point). As the possibility of economic paralysis grew due to the spread of the novel coronavirus disease (COVID-19), the Fed moved up its schedule and lowered the rate to near 0%. Not only the Fed but also six major central banks worldwide, including the European Central Bank (ECB), announced cooperation to secure dollar liquidity on the same day.

On the 15th (local time), the Fed announced it would cut the benchmark interest rate from the previous 1.00-1.25% to 0.00-0.25%, a 1 percentage point reduction. Following a 0.5 percentage point cut on the 3rd, the Fed made a 'big cut' by sharply lowering the rate by a total of 1.5 percentage points in less than two weeks.

The Fed ended the zero interest rate era in December 2015 by raising the benchmark rate to 0.25-0.50%, but as the economic impact of COVID-19 spread, it lowered the rate to zero within a month. Notably, the Fed's decision was made two days before the Federal Open Market Committee (FOMC) meeting scheduled for the 17th-18th, indicating it was an emergency decision. This suggests that market conditions were unfavorable and there was an urgent need for stimulus.

Separately from the rate cut, the Fed also announced the purchase of $700 billion worth of Treasury securities and mortgage-backed securities (MBS) to supply liquidity. The Fed had previously implemented quantitative easing (QE) three times totaling $4.5 trillion along with zero interest rates to overcome the 2008 global financial crisis. CNBC evaluated this move as a reactivation of the QE program.

The Fed also emphasized, "We are prepared to use a wide range of tools to support the flow of credit to households and businesses," and stated, "We will act appropriately and use our tools to support the economy going forward," hinting at the possibility of further expansion of bond purchases.

The Fed was not alone in taking action that day. Along with the Fed, the Bank of Canada, Bank of England (BOE), Bank of Japan (BOJ), ECB, and Swiss National Bank announced measures to improve dollar liquidity through existing dollar swap agreements. In effect, the central banks of the Group of Seven (G7) formed a joint front to respond to COVID-19.

In the statement released that day, the Fed openly acknowledged the economic crisis caused by COVID-19. Fed Chair Jerome Powell said, "COVID-19 is damaging communities and harming economic activity in many countries, including the United States," and assessed that "the global financial system has been seriously affected." He added, "We will maintain the current level of interest rates until the economy overcomes the current COVID-19 situation," indicating the intention to keep rates near zero for a considerable period even after the situation stabilizes.

This content was produced with the assistance of AI translation services.