(CNN) — In a bold, emergency action to support the economy during the coronavirus pandemic, the Federal Reserve on Sunday announced it would cut its target interest rate near zero.
The swifter-than-expected rate cut is designed to prevent the kind of credit crunch and financial market disruptions that occurred the last time the Fed had to cut rates all the way to the bottom: The Fed last cut rates to zero during the global financial crisis just over a decade ago.
In addition to rate cuts, the Fed also said it would purchase another $700 billion worth of Treasury bonds and mortgage-backed securities. It also struck a deal with five other foreign central banks, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank, to lower their rates on currency swaps to keep the financial markets functioning normally.
The Fed last lowered currency swaps during the European debt crisis in 2011. The move makes borrowing US dollars cheaper for banks around the world. Swapping currencies, particularly dollars, is a staple of global financial transactions.
The coordinated move will lower the cost of short-term borrowing for banks around the globe, and it could also keep the global economy clear of an all-out credit crunch similar to the one the world’s economies encountered a decade ago.
The bond and mortgage security purchases are tools the Fed previously used during the most recent recession. They helped to shore up housing and US government debt — two crucial markets that keep the gears of the American financial system turning.
Although the underlying US economy has remained on solid ground — unemployment is at a historic low and consumer confidence has stood near all-time highs — the Fed said the coronavirus outbreak has significantly hurt the global financial conditions.
The Fed could, in theory, take rates negative, as some other central banks have, but Federal Reserve Chairman Jerome Powell has resisted that idea. The Fed said Sunday it would hold rates steady near zero until it is confident that the US economy pulls out of the coronavirus-fueled economic quagmire.