U.S. Federal Reserve slashes rates to zero to fight coronavirus outbreak

The Federal Reserve at an emergency meeting on Sunday announced it’s slashing its benchmark interest rate to zero, in what is its second response to the economic turmoil that’s resulted from the coronavirus outbreak.

In addition, the Fed announced it will buy $700 million worth of Treasury and mortgage bonds to help stabilize markets.

The measures follow an earlier interest rate cut on March third which saw mortgage rates plunge to an all-time low. According to Freddie Mac, the 30-year fixed-rate mortgage averaged 3.29% for the week ending March 5, but experts say the Fed’s latest cuts may not send rates even lower.

Bankrate.com notes that the Fed’s benchmark rate isn’t directly tied to mortgage rates, even though it usually influences them. Instead, mortgage rates are more directly tied to the 10-year Treasury note, which had been pushed to new lows this month, only to grow slightly in the past 7 days. But economists warn that mortgage rates don’t always mirror the Fed’s adjustment, and that lender backlogs also tend to keep rates from going too low.

Because banks are handling more loan requests than they can handle, financial institutions are charging some borrowers more. This trend will ease overtime as the backlog is worked off and lenders staff up or figure out how to do more work remotely.

Matthew Graham, chief operating officer at Mortgage News Daily, said mortgage rates probably won’t dip much lower following the Fed’s meeting on Sunday. But he said rates could still go lower at some point in the coming weeks due to the Fed’s mortgage bond buying effort. Bankrate.com added that the Fed’s action on Sunday is its largest emergency reduction in its more than 100-year history.

The Federal Open Market Committee lowered its federal funds rate to a target range between 0%–0.25%.

“The monetary policy change is the same one applied a decade ago during the Great Recession—the lowest rates combined with quantitative easing,” said Lawrence Yun, chief economist at the National Association of Realtors. “This is an all-out measure to prevent a recession and fight the fear that is blanketing the country. It is the right policy, since the policy can easily be reversed should a vaccine be discovered or the virus goes away.” Yun adds that during the last recession, real estate was on “wobbly ground with loose lending and too much supply. Today, there is no subprime lending and too little supply. The real estate market will hold on much better.”

Fed officials on Sunday reassured Americans that the U.S. economy has the ability to remain resilient against the slowdown caused by the coronavirus. But some economists have warned that a recession could be on the horizon. “The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” the FOMC said in a statement. “Global financial conditions have also been significantly affected. 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.”