x
Fed, key interest rates drop to almost zero percent
The US Federal Reserve is taking truly drastic measures in the corona crisis. The Fed cut the key interest rate to almost zero percent and put together a crisis response package. The Asian central banks are also taking measures.
The Fed announced on Sunday evening (local time) that the key interest rate would now be reduced by one percentage point to a corridor of 0 to 0.25 percent. In addition, it announced a package of measures in coordination with other central banks. In the wake of the corona virus crisis, leading central banks around the world had facilitated the supply of the financial system with the world reserve currency, the US dollar, through joint actions.
Further steps could follow due to economic damage from the spread of the virus. "We are prepared to use our full range of instruments," said Fed chief Jerome Powell in Washington on Sunday evening (local time). The Fed still has enough room for maneuver. However, the head of the central bank does not consider negative interest rates to be an appropriate instrument.
This surprisingly cut the key monetary policy rate for the second time in two weeks. Analysts had not expected such a move until Wednesday at the regular FOMC meeting. In addition, they only had a reduction of 50 instead of a full 100 basis points on their notes.
In order to calm the financial markets and to cushion the impending global economic downturn as much as possible, the Japanese central bank also provided additional liquidity in the morning. For example, significantly more shares of index funds are to be bought on the market. Accordingly, this includes the acquisition of exchange-traded index funds (ETFs) and corporate bonds. In addition, Japanese companies are to be offered loan programs at zero interest.
Following the publication of the monetary policy measures, Japan's central bank chief Haruhiko Kuroda has assured that the Bank of Japan will closely monitor further economic developments. There will be no hesitation in easing monetary policy even further. However, Kuroda assumed that the current measures will support the market. The country cut its interest rates to zero as early as 1999 and is currently even in the red, requiring penalty interest. However, the measure did not boost the economy, given the recent growth of 0.6 percent.
The Bank of Korea also reacted and lowered the key interest rate by 0.50 percentage points to 0.75 percent. The Hong Kong central bank had previously reduced the key interest rate last night by 0.64 percentage points to 0.86 percent.
The fact is: While other central banks such as the European Central Bank (ECB) have been rather hesitant about the corona crisis, the Fed is already in crisis mode. "The nature and scope of these measures was exceptional according to each historical standard," said Nathan Sheets, chief economist at PGIM Fixed Income.
The US Federal Reserve had already cut its key interest rate unexpectedly at the beginning of March. The decisions also go far beyond interest rates. The Fed wants to support the economy with a $ 700 billion bond purchase program and temporarily grant banks emergency loans - like after the great financial crisis in 2008. Already in the middle of the month it had increased the money injection for banks through so-called repo transactions.
More exchange rate information for euros in US dollars
But as drastic as the steps the Fed has taken so far in the fight against the economic effects of the corona virus, it has so far been unable to reassure investors in the stock markets. With its rate cut two weeks ago, the Fed even increased the uncertainty and panic on the markets, some market observers accuse it.
Also on Monday there is little to see from a lasting calm on the stock markets - on the contrary: the future on the US leading index, the Dow Jones Industrial Average, is now losing 4.6 percent. In the morning, the Dax falls below the 9,000 point threshold for the first time since 2016. At the start of trading at 9:00 a.m., it stood at 8,715 points, a decrease of 5.6 percent compared to the closing level on Friday.
