Page 25 - ARUBA TODAY

BUSINESS Tuesday 17 March 2020
A25

AP Explains: What did the Federal Reserve do Sunday and why?

WASHINGTON (AP) — Bran- central bank has now re- to lower borrowing costs
dishing an array of financial turned that rate — which now, it would become
weapons, the Federal Re- influences many consumer even more important once
serve announced extraor- and business loans — to its the outbreak passes and
dinary action Sunday to try record-low level. consumers and businesses
to blunt the heavy damage And yet Chairman Jerome are confident enough to
the coronavirus outbreak Powell acknowledged in ramp up spending again.
has begun to inflict on the a conference call with re- President Donald Trump
U.S. economy. porters that the Fed's ac- has urged the Fed to con-
It's slashing its benchmark tion isn't likely to prevent sider cutting rates below
interest rate to near zero. the recession. The main zero, but Powell said the
It's buying $700 billion in reason: The economy is Fed isn't considering that
bonds. It's moving aggres- coming to a standstill be- now.
sively to smooth disruptions cause of the necessary "We do not see negative
in the Treasury market. behavioral changes being rates as an appropriate Federal Reserve Chair Jerome Powell speaks during a news
And it's prepared to do made across the country policy in the United States," conference, Tuesday, March 3, 2020, to discuss an announce-
more. to stem the viral outbreak he said on the conference ment from the Federal Open Market Committee, in Washington.
The surprise intervention — an avoidance of travel, call Sunday.
was an acknowledgement shopping and mass gather- ___ ies influence interest rates entire economy," Powell
by the Fed that the econ- ings. IT WILL BUY AT LEAST $700 on many other loans and said.
omy seems suddenly on Rather, the economic out- BILLION IN BONDS are used to price other ___
the brink of recession and look, the Fed recognizes, On Monday, the Fed will global financial assets. Last IT WILL RELAX BANKS' RE-
a signal that it will do all it depends mainly on how start buying at least $500 week, banks and other SERVE AND BUFFER RE-
can to minimize the blow quickly the United States billion in Treasury securities large investors were unable QUIREMENTS
to households, companies can arrest the spread of and at least $200 billion of to sell all the 10-year Trea- The Fed said it has dropped
and the economy. the virus. mortgage-backed securi- suries they wanted to un- its requirement that banks
Collectively, its actions are So what, exactly, did the ties issued by Fannie Mae load — pressure that inflat- hold cash equal to 10% of
intended to keep markets Fed announce Sunday? and Freddie Mac. Those ed rates in that market. The their customers' deposits,
functioning and lending And why? purchases are intended to Fed's buying is intended to thereby allowing banks to
flowing to businesses and ___ smooth the functioning of plug that gap and keep lend that money instead.
consumers. Otherwise, as THE FED SLASHED ITS BENCH- the Treasury bond market rates low. It also said that banks can
revenue dries up for count- MARK RATE TO NEARLY and mortgage lending and "When stresses arise in the use additional cash buffers
less small businesses that ZERO: to keep long-term borrow- Treasury market, they can that were imposed after
have suddenly lost custom- The Fed cut its short-term ing rates down. reverberate throughout fi- the 2008 financial crisis for
ers, these employers could rate by a full percentage The Treasury market is the nancial markets and the lending. q
be forced to lay off workers point, its steepest cut since largest and most important
or even seek bankruptcy the financial crisis in 2008, such market in the world,
protection. to a range of zero to 0.25%. because yields on Treasur-
By slashing its benchmark That is the lowest level since
short-term rate and pump- December 2015, when the
ing hundreds of billions of Fed raised rates for the first
dollars into the financial time after leaving them at
system, the Fed's moves re- nearly zero for seven years.
called the emergency ac- Over time, this move should
tion it took at the height of lower a broad range of
the financial crisis. Starting borrowing costs for things
in 2008, the Fed cut its key like homes, credit cards
rate to near zero and kept and autos. Powell said that
it there for seven years. The while the move is intended