Fed cuts interest rate to near-zero, moves to prop up mortgage market

Powell said board is “willing to be patient” but won’t go to negative rate

Jerome Powell (Credit: Chip Somodevilla/Getty Images and iStock)
Jerome Powell (Credit: Chip Somodevilla/Getty Images and iStock)

Acknowledging that the full scope of the coronavirus pandemic’s impact on the economy is unknowable, Federal Reserve Chairman Jerome Powell on Sunday night said the Fed is willing to be patient as it cuts interest rates.

In the most drastic actions since the 2008 financial crisis, the Federal Reserve Sunday afternoon announced it cut its benchmark interest rate to near zero, and said it would buy hundreds of billions of dollars in assets in order to blunt the economic impact of the pandemic.

Powell said during a conference call in the evening that he expects economic activity to be weak in the second quarter, and that the Fed is “willing to be patient” and hold interest rates at zero until “we’re confident the economy has weathered recent events.”

“That’s the test we’ve written down,” he said.

Powell said the Fed does not believe in moving interest rates into negative territory, as other central banks have been experimenting with since before the outbreak of the coronavirus in order to foster economic growth.

In addition to the interest rate cut, the chairman announced the Fed will buy $700 billion in assets – $500 billion worth of Treasuries and $200 billion worth of mortgage-backed securities – in order to provide liquidity to those markets.

But Powell stopped short of calling the measure “quantitative easing,” the controversial policy the Fed relied on in the wake of the 2008 financial crisis.

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“In terms of what it’s labeled, that’s of less interest to me,” he said.

Alan Rosenbaum, CEO of mortgage lender GuardHill Financial, said the interest rate cut and the injection of liquidity were good signs that the Fed was ready to help support the economy.

But he noted that when the Fed cut the interest rate earlier this month, it mostly led to mortgage rates going up, as borrowers filed more applications – particularly for refinancings – and demand rose.

“I don’t expect mortgage rates to drop significantly, but it is a motivating factor to get banks to lend,” he said.

The Fed had planned to hold its meeting later this week but decided to move it up after some disappointing market events last week. The Fed on Thursday said it would lend banks $1.5 trillion to prop up the struggling repurchase market that many companies use to borrow short-term debt. Powell said the market’s reaction to the announcement was disappointing, spurring the Fed to move quicker.

Nearly two weeks ago the Fed implemented a surprise rate cut as the stock market went into turmoil amid fears the coronavirus could cause a global recession. The cut, however, did not assague investors’ fears, and last week the Dow Jones Industrial Average fell into bear territory, ending an 11-year bull market.

Contact Rich Bockmann at rb@therealdeal.com or 212-673-5081.