On Sunday (Mar 15), the Federal Reserve (aka “the Fed”), the central bank of the United States, announced that it had lowered the target range for the Federal Funds Rate (FFR) — by 100 basis points — to 0 to 1/4 percent, a move that seems to have spooked traders even further rather than calm their nerves.
The FFR is “the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an uncollateralized basis.”
The Fed’s press release (titled “Federal Reserve issues FOMC statement”) started by acknowledging that COVID-19 had “harmed communities and disrupted economic activity in many countries, including the United States” and that “Global financial conditions have also been significantly affected.”
It then explained that the Federal Open Market Committee (FOMC) “seeks to foster maximum employment and price stability” and since “the effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook”, it had decided to “lower the target range for the federal funds rate to 0 to 1/4 percent.”
The Fed also announced $700 billion in quantitative easing:
“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 also reduced (effective on March 26) “reserve requirement ratios” (or MSNBC journalist put it “the cash banks must keep on hand”) to 0%; the Fed says that this action “eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses.”
The move to cut the FFR to near 0% comes is the second emergency rate cut by the Fed since the COVID-19 crisis started (the first emergency rate cut of 50 basis points, or 0.5%, was announced on March 3).
Although the Fed’s actions increases liquidity and makes it easier for U.S. businesses and households to obtain loans, most traders probably understand that the COVID-19 crisis is more of a health crisis than a financial crisis (even though the former can cause the latter) and such actions by the world’s central banks are unlikely to be very effective in reducing COVID-19’s impact on the global economy since almost every kind of business will be negatively affected by the lockdowns and travel bans being announced all over the world.
Also, traders probably also realize that the Fed’s move to cut the FFR to near zero now than do it over time through a number of smaller cuts shows that it must be very worried about the U.S. economy.
Although the Bitcoin price jumped to $5,950 within one hour of the Fed’s announcement (which came at 17:00 EST or 21:00 UTC) on Sunday, currently, Bitcoin is trading at $4,864, which is roughly 6.3% lower than it was before the announcement and down 7.67% in the past 24-hour period.
