Cut

The Fed slashed interest rates to almost 0% — what does this mean, and will it help?

Tuesday, March 17, 2020 by Snacks

Like a slasher film... But with interest rates. The Fed's yanked out all the stops in its financial medicine arsenal. On March 3, the nation's central bank doled out the first emergency rate cut since the '08 financial crisis. On Sunday, it cut interest rates to near 0% and announced it's dropping $700B on long-term bonds. Here's what the Fed wants:

  • Interest rates to fall: So that you'll spend on stocks/stuff and take out loans rather than hoarding your money in an interest-bearing savings account, bonds, or under mattresses.... So it lowered rates to almost 0%.
  • More money to flow: So that banks have enough to give/lend to you (so that you can spend).... So it's dropping $700B to buy Treasury and mortgage-backed securities, which flushes the financial system with more freshly printed cash for banks.
  • More cash = less demand for cash = lower interest rates to borrow cash = more loans. That last one could save struggling companies and help kickstart an economic recovery.

But the Fed is fighting a different beast... The COVID-19 pandemic. It's trying to prevent the virus from causing a financial crisis — but investors are looking for medical solutions, not monetary ones.

THE TAKEAWAY

There's only so much the Fed can do... And it's already done it. With all these drastic measures, the Fed has run out of rockets in its economic bazooka. Now it's up to Congress and the White House to help with changes in taxes and spending to help the consumers and small businesses seriously squeezed by the econ shutdown. This might include government bailouts for struggling industries (reportedly, airlines could be first).

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