In an unprecedented move, the Federal Reserve on Sunday (March 15) cut the prime interest rate to 0%, and announced a $700 billion purchase of securities to inject money into an economy expected to slow dramatically as a result of the global COVID-19 pandemic.
Despite the Federal Reserve move and assurances by President Donald Trump that federal efforts were on track to boost testing and contain COVID-19 spread, the Dow Jones Industrial futures were down more than 1,000 points and the broader S&P 500 futures were down more than 125 points Sunday evening.
“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the Fed noted in its statement. “Global financial conditions have also been significantly affected. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Information received since the Federal Open Market Committee met in January indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low.”
Although critical of past actions by the Federal Reserve, President Trump praised the actions taken Sunday.
“It makes me very happy,” Trump said during a White House briefing. “And I want to congratulate the Federal Reserve. … That’s really great for our country. It’s something that we’re very happy, I have to say this, I’m very happy. And they did it in one step, they didn’t do it in four steps over a long period of time. They did it in one step and I think that people in the market should be very thrilled.”
The Fed said providing access to credit for businesses and others was behind the move to buy securities.
“To support the smooth functioning of markets for Treasury securities and agency mortgage-backed securities that are central to the flow of credit to households and businesses, over coming months the Committee will increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion,” the Fed noted.
McKinsey & Co., a global consulting firm, has issued estimates on the global economic impact of the virus. In the scenario in which the virus is contained and causes the least deaths and disruption, the global GDP for 2020 falls from a previous estimate of 2.5% to 2%.
“The US economy recovers by the end of Q1. By that point, China resumes most of its factory output; but consumer confidence there does not fully recover until end Q2. These are estimates, based on a particular scenario. They should not be considered predictions,” McKinsey noted of the best case scenario.
Under the worst case scenario, the virus continues spreading through the third quarter of 2020, “potentially overwhelming healthcare systems around the world and pushing out a recovery in consumer confidence to Q3 or beyond. This scenario results in a recession, with global growth in 2020 falling to between –1.5 percent and 0.5 percent.”