In response to economic concerns in the United States stemming from the coronavirus pandemic, the Federal Reserve on Sunday took the drastic measure of slashing interest rates to nearly zero.
The central bank set its benchmark to the range of 0% to 0.25% — the second cut over the past two weeks. On March 3, the rate was lowered by half a percentage point to the range of 1% to 1.25%, marking the first cut of its kind since the 2008 financial crisis.
“My colleagues and I took this action to help the U.S. economy [stay] strong in the face of new risks to the economic outlook,” the Fed announced in a statement. “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. … The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses.”
Here’s how the emergency rate cut impacts consumers and companies.
Borrowing is cheaper.
The continued spread of COVID-19, which has caused 69 deaths and sickened more than 3,800 across the country, has led to a broader shutdown of economic activity in the U.S. When the Fed decides to reduce the funds rate, credit card APRs, student loans, auto loans, mortgage rates and more become less expensive, essentially making it cheaper for consumers to borrow and spend. Further, as the coronavirus crisis worsens, the central bank has taken the extreme step of launching a $700 billion quantitative easing program in which it increases its holdings of Treasury securities and mortgage-backed investments in an effort to pull down long-run interest rates and get the battered economy back up and running.
Consumer confidence might get a boost.
With consumer confidence improving less than expected last month, struggling retailers and mall owners might also benefit from those lower interest rates on credit cards, student loans and auto financing, all of which free up consumers with more money to spend on nonessentials. However, such spending is highly dependent upon the shopper’s ability to visit retailers, many of which have been temporarily shuttered stores or are operating on significantly reduced hours amid widespread restrictions from state and local governments across the country. E-commerce giant Amazon is among the retailers that have already reported an increasing number of customers buying online, as Americans have been encouraged by health authorities to stay at home in order to avoid the spread of the illness.
Another round of economic stimulus measures could be next.
Industries across the board, from aviation and transportation to retail trade, have already begun to face coronavirus-related declines in revenues and profits. As the Senate returns to work today to take up the House-passed relief package, lawmakers are discussing an additional fiscal stimulus that includes broader economic measures, such as a tax rebate, payroll tax cut and expanded unemployment insurance as well as grants and loans for small businesses. “It is clear that confronting this virus will take boldness, bipartisanship and a comprehensive approach,” Senate Majority Leader Mitch McConnell said in a statement on Sunday. “Discussions are already underway on these key pillars. The Senate is eager to work with the administration and the House to deliver the solutions our nation deserves.”
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