Page 25 - ARUBA TODAY

BUSINESS Monday 16 March 2020
A25

Fed takes emergency steps to slash rates and ease bank rules

By CHRISTOPHER RUGABER Posen advocates fiscal said, when asked if the U.S.
AP Economics Writer steps such as providing sick is in recession. "The real is-
WASHINGTON (AP) — The leave and pay for quaran- sue is what economic tools
Federal Reserve took emer- tined workers and rolling are we going to use to
gency action Sunday to over bank loans to small make sure we get through
help the economy with- and medium sized busi- this."
stand the coronavirus by nesses hit hard by the out- On Saturday, President
slashing its benchmark in- break. Donald Trump reiterated
terest rate to near zero and "This isn't going to be the his frequent demand that
saying it would buy $700 magic bullet that saves ev- the Fed "get on board and
billion in Treasury and mort- erything,'' said Timothy Duy, do what they should do,"
gage bonds. an economist at the Univer- reflecting his argument
The Fed's surprise an- sity of Oregon who follows that benchmark U.S. rates
nouncement signaled its the Fed. should be as low as they
concern that the viral out- But it sends a signal to Con- are in Europe and Japan,
break will depress eco- Federal Reserve Chair Jerome Powell speaks during a news gress that the economy where they're now nega-
nomic growth in the com- conference, Tuesday, March 3, 2020, to discuss an announce- needs emergency stimulus. tive. Negative rates are
ing months and that it's ment from the Federal Open Market Committee, in Washington. Duy also predicted that the generally seen as a sign
prepared to do whatever it Fed will follow up with more of economic distress, and
can counter the risks. It said dropped its normal require- more than a decade ago. moves, including possibly there's little evidence that
it would keep its key rate at ment that banks hold cash Still, with the virus' spread changing its inflation target they help stimulate growth.
a range between zero and equal to 10% of its cus- causing a broad shutdown to allow for more stimulus Fed officials have indicat-
0.25% until it feels confident tomers' deposits, allowing of economic activity in the and providing more sup- ed that they're unlikely to
that the economy can sur- banks to lend those funds. United States, the Fed faces port for commercial paper cut rates below zero.
vive what's become a sud- It also said banks can use a daunting task. Its tools — -- the short-term notes that With the virus depressing
den near-shutdown of eco- additional cash buffers that intended to ease borrow- companies issue to meet travel, spending, and cor-
nomic activity in the United were imposed after the ing rates, facilitate lend- expenses. porate investment and
States. 2008 financial crisis for lend- ing and boost confidence "I don't think they're done forcing the cancellation
The central bank will buy ing. — aren't ideally suited to yet,'' Duy said. of sports leagues, business
$500 billion of Treasury se- "The Federal Reserve is pre- offset a fear-driven halt in Duy said the asset purchas- conferences, music per-
curities and $200 billion of pared to use its full range spending and traveling. es are an "effort to keep formances, and Broadway
mortgage-backed securi- of tools to support the flow "We have to hope that markets from freezing up.'' shows, economists increas-
ties — an effort to smooth of credit to households and the Fed getting out in front Earlier, Treasury Secretary ingly expect the economy
over market disruptions businesses and thereby of events, not to mention Steven Mnuchin said that to shrink for at least one or
that have made it hard for promote its maximum em- other central banks, pushes both the central bank and two quarters. A six-month
banks and large investors ployment and price stabil- the economy in the right di- the federal government contraction would meet
to sell Treasuries as well as ity goals," the central bank rection,'' said Adam Posen, have tools at their disposal an informal definition of a
to keep longer-term rates said. president of the Peterson to support the economy. recession.
borrowing rates down. The "It confirms that the Fed Institute for International Mnuchin also said he did Two weeks ago, in a sur-
disruptions in the Treasury sees the economy go- Economics. "The heavy lift- not think the economy is prise move, the Fed sought
market sent the yield on ing down ... very sharply'' ing for stimulus and for pre- yet in recession. Most econ- to offset the disease's drags
the 10-year Treasury rising toward recession, Adam venting lasting economic omists, however, believe a on the economy by cutting
last week, an unusual move Posen, president of the Pe- damage has to be done recession is already here, its short-term rate by a half-
that threatens to push bor- terson Institute for Interna- on the fiscal side. That's na- or will be soon.. JPMorgan percentage point — its first
rowing costs for mortgages tional Economics, said. ture of this shock.'' Chase predicts the econo- cut between policy meet-
and credit cards higher. The Fed also announced "It confirms that the Fed my will shrink 2% in the cur- ings since the financial
By aggressively slashing its that it has cut interest rates sees the economy going rent quarter and 3% in the crisis. Its benchmark rate
benchmark short-term rate on dollar loans in a joint ac- down ... very sharply'' to- April-June quarter. is now in a range of 1% to
to near zero and pump- tion that it has taken with ward recession, Posen said. "I don't think so," Mnuchin 1.25%. q
ing hundreds of billions of five central banks over-
dollars into the financial seas. That is intended to
system, the Fed's moves ensure that foreign banks
Sunday recalled the emer- continue to have access
gency action it took at the to dollars that they lend to
height of the financial crisis. overseas companies. FOR RENT
Starting in 2008, the Fed cut All told, the Fed's actions
its key rate to near zero and amount to a recognition
kept it there for seven years. that the U.S. economy fac-
The central bank has now es its most perilous juncture
returned that rate -- which since the recession ended
influences many consumer
and business loans -- to its
record-low level.
Some of the Fed's new steps
are intended to free up
money for banks to lend.
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