Fed Meeting: FOMC Slashes Rates to Zero at a Sunday Emergency Meeting

In an unprecedented Sunday emergency FOMC meeting, the Fed slashed the target federal funds rate by 100 basis points which moves rates back to near zero. The Fed also began a $700 billion quantitative easing program. After going all last week with no emergency FOMC meeting, I had assumed the Fed was going to wait until its regularly scheduled meeting on Tuesday and Wednesday before announcing policy actions. This Sunday meeting is a surprise, and I think it shows how serious the coronavirus pandemic is. Below are a few of the important excerpts of today’s FOMC statement:

The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected.

[...]

The effects of the coronavirus will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee decided to lower the target range for the federal funds rate to 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

[...]

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.

[...]

In a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window, intraday credit, bank capital and liquidity buffers, reserve requirements, and—in coordination with other central banks—the U.S. dollar liquidity swap line arrangements. [...]

After the FOMC statement, Fed Chair Jerome Powell gave a phone press conference and Q&A. One question asked to the Fed Chair was the possibility that the Fed will move the federal funds rate into negative territory, similar to actions taken by other central banks. Fed Chair Powell essentially said that it wasn’t a policy option. Let’s hope that holds.

The Fed Chair said that this emergency meeting will replace the regularly scheduled meeting this week, and that the FOMC will not be releasing its Summary of Economic Projections (SEP) which includes the “dot plot” until June since too much depends on how the coronavirus outbreak evolves.

One voting member dissented on the vote. Cleveland Fed President Loretta J. Mester thought the rate cut should only be 50 basis points.

Economist Tim Duy just released his review of this emergency meeting with a useful overview of the policy action along with his insights.

Effect on CD and Savings Account Rates

It’s hard to believe that we’re back at zero. Banks and credit unions had been in the process last week of responding to the 50bp rate cut on March 3rd. Now there’s another 100bp rate cut. Needless to say that we will likely see many large CD and savings account rate cuts this week.

With CD rates likely to fall fast this week, make sure you check the websites of the banks and credit unions before deciding to apply for a CD. My team will do our best to keep the DA rate tables up-to-date, but there will likely be some delay between what we show and the latest rates published by the bank or credit union. Also, make sure the bank or credit union will lock the CD rate when your online application completes. If they only lock the rate by the time they receive the funds, you may get a lower rate. For example, Ally Bank gives you 10 days of your account opening date to receive the funds. If the funds arrive after this, you’ll get the current interest rate for the day they receive the funds.

I’ll have more discussion on savings account and CD strategies on Monday.

The Pandemic and Future Interest Rates

In this coronavirus pandemic, there are many other more important concerns than interest rates. Hopefully, we’ll get through this pandemic with minimal loss of life and disruption. In a best case scenario, things will get back to normal in a few months and the economy will bounce back strongly. I think it’s likely that rates will remain at zero for at least the next year even if this best case scenario occurs. The Fed said today that it will want to be “confident that the economy has weathered” this pandemic before it returns to rate hikes.

For now, let’s keep our thoughts and prayers for everyone’s health and safety in this pandemic.