Fed, other central banks announce moves to bolster liquidity; FOMC cuts fed funds to range of 0-0.25%

The U.S. joined central banks of Canada, England, Japan, Europe, and Switzerland Sunday to announce coordinated action to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements.

Under this action, the Federal Reserve, the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank “have agreed to lower the pricing on the standing U.S. dollar liquidity swap arrangements by 25 basis points, so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 25 basis points,” the Fed said in announcing the action. “To increase the swap lines’ effectiveness in providing term liquidity, the foreign central banks with regular U.S. dollar liquidity operations have also agreed to begin offering U.S. dollars weekly in each jurisdiction with an 84-day maturity, in addition to the 1-week maturity operations currently offered. These changes will take effect with the next scheduled operations during the week of March 16. The new pricing and maturity offerings will remain in place as long as appropriate to support the smooth functioning of U.S. dollar funding markets.”

The Fed said the swap lines are available standing facilities and serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses, both domestically and abroad.

Also Sunday, the Federal Open Market Committee (FOMC) said it lowered the federal funds target rate by a full percentage point, to a range of 0 to 0.25%. “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 panel said. “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. This action will help support economic activity, strong labor market conditions, and inflation returning to the Committee’s symmetric 2 percent objective.“

The FOMC also said it will, over coming months, increase its holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion, It said it will reinvest all principal payments from the Federal Reserve’s holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

It also said the Open Market Desk has recently expanded its overnight and term repurchase agreement operations.

“The Committee will continue to closely monitor market conditions and is prepared to adjust its plans as appropriate,” it said.

Coordinated Central Bank Action to Enhance tihe Provision of U.S. Dollar Liquidity

Federal Reserve issues FOMC statement

Federal Reserve actions to support the flow of credit to households and businesses