U.S Fed resorts to another emergency rate cut to 0.25% to tackle the economic impact of Coronavirus

With sharply rising cases of Coronavirus in the United States, the U.S Federal Reserve is committed to adopting measures that can tackle its economic impact. In its recent attempt to shelter the U.S economy against the virus-driven disruptions, the U.S Fed announced another emergency rate cut to near zero on Sunday evening.

Fed Chair Jerome Powell also declared the launch of a quantitative easing program worth $700 billion in the policy meeting aimed at promoting economic growth in the U.S as the Coronavirus pandemic threatens to push the global economy into recession.

Benchmark Rate Was Previously Targeted At 1.0% To 1.25%

The U.S Federal Reserve’s funds rate is a benchmark used by the financial institutions for lending (short-term). The rate is also applicable as a peg that determined a range of consumer rates as well. Following the Fed’s policy meeting on Sunday, the target for the benchmark rate is now 0.0% to 0.25%. The previous rate cut in the first week of March had highlighted the benchmark rate to be targeted at 1.0% to 1.25%.

Owing to the massive disruptions in the financial markets, the Fed also decided in favor of reducing the emergency lending rate to 0.25% (125 basis points cut). Powell also announced an extension in the term of loans in the U.S to 90 days.

While the U.S Federal Reserve took an aggressive
stance to protect the economy on Sunday evening, the financial markets didn’t respond positively to the announcement initially. On Monday morning, Wall Street reported a massive 1,000 points of decline in Dow futures.

Fed’s Note On Sunday’s Rate Cut

According to a Fed note:

“The discount window in emergency lending for banks plays an important role in supporting the liquidity and stability of the banking system and the effective implementation of monetary policy, and supports the smooth flow of credit to households and businesses.”

U.S financial institutions can resort to the discount window to meet their liquidity requirements. More often than not, however, it is avoided since it is an indicator that the institute is facing financial challenges and, therefore, gives out a bad message. The response to Fed’s announcement on Sunday has been slow but persistent in the forex market. EUR/USD closed the last week at 1.1102 level on Friday and is currently exchanging hands at around 1.1180 on Monday morning. The pair is likely to find an immediate resistance around 1.12 region.