US Fed cuts rates by 50 bps to 1-1.25% in coronavirus fight

While the fundamentals of the US economy remained strong, the FOMC said the coronavirus posed evolving risks to economic activity. 

“In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 05 percentage point, to 1 to 1,25 per cent,” the FOMC stated in a release. 

FOMC said it is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.

The board of governors of the Federal Reserve System voted unanimously to set the interest rate paid on required and excess reserve balances at 1.10 per cent, effective 4 March 2020.

As part of its policy decision, the FOMC authorised the Federal Reserve Bank of New York to undertake open market operations as necessary to maintain the federal funds rate in a target range of 1 to 1.25 per cent. It will continue purchasing treasury bills at least into the second quarter of 2020 to maintain over time ample reserve balances at or above the level that prevailed in early September 2019. 

The Fed will also continue conducting term and overnight repurchase agreement operations at least through April 2020 to ensure that the supply of reserves remains ample even during periods of sharp increases in non-reserve liabilities, and to mitigate the risk of money market pressures that could adversely affect policy implementation. 

In addition, the Fed will conduct overnight reverse repurchases (and reverse repurchases with maturities of more than one day when necessary to accommodate weekend, holiday, or similar trading conventions) at an offering rate of 1.00 per cent, in amounts limited only by the value of Treasury securities held outright in the System Open Market Account that are available for such operations and by a per-counterparty limit of $30 billion per day.

It will continue rolling over at auction all principal payments from the Federal Reserve's holdings of treasury securities and continue reinvesting all principal payments from the Federal Reserve's holdings of agency debt and agency mortgage-backed securities received during each calendar month. 

Fed said principal payments from agency debt and agency mortgage-backed securities up to $20 billion per month will continue to be reinvested in treasury securities to roughly match the maturity composition of treasury securities outstanding; principal payments in excess of $20 billion per month will continue to be reinvested in agency mortgage-backed securities. Small deviations from these amounts for operational reasons are acceptable.

The Fed will also engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions."