
Federal Reserve slashes interest rates to zero - ncw96
https://www.washingtonpost.com/business/2020/03/15/federal-reserve-slashes-interest-rates-zero-part-wide-ranging-emergency-intervention/
======
aazaa
The Fed can, and will do much, much more. The signal here should be read as
"whatever it takes to avoid a depression."

Among other steps, this is likely to mean:

\- Negative-yielding long-term treasuries

\- Direct purchase of stocks or ETFs, which would require congressional
approval. Expect the discussions to start soon.

The steps already taken and the ones to be taken will create financial
manipulation on a scale never before seen.

If the Fed loses this fight, game over.

~~~
inferiorhuman
_If the Fed loses this fight, game over._

This isn't the Fed's fight. Monetary policy won't fix this.

~~~
jfoutz
I'm sort of surprised they didn't try to push the issue from the bottom. give
every tax filer some amount of money say, $200. A bonus for each dependent,
say, $100.

pulled numbers absolutely out of thin air.

I thought the issue was money sloshing around at the bottom, a couple hundred
bucks can be a big deal when you're out of work.

Ah well, I'm sure the experts have it well in hand.

~~~
miohtama
It's called helicopter money. Australia and Hong Kong already announced going
down this route.

[https://en.m.wikipedia.org/wiki/Helicopter_money](https://en.m.wikipedia.org/wiki/Helicopter_money)

It is very last measure as in that point you are basically admitting that
capitalism has failed.

~~~
gentleman11
Alberta did this with a surplus once. It was great. It doesn’t need to be a
last resort at all

~~~
amiga_500
Do it every month. Call it UBI. And fund it from land tax not taxing labour,
to encourage people to do actual useful things. Like manufacturing ventilators
instead of playing the stock market or the land market.

------
sershe
At this point, I'm actually starting to wonder. If we literally do nothing
about the virus, or do the bare minimum, the worst case scenario based on the
numbers I hear is 7.7b * 0.6 (total infections) * 0.02-0.03 (presumed
mortality rate after the healthcare system collapses MINUS the rate if it
doesn't), ~115m people are going to die worldwide. This appears to me to be
the absolute worst case scenario given current knowledge; gradually slowing
infection rates, the fact that the developing world skews younger and is less
connected, etc., may make it better. That 115m will skew heavily towards the
elderly, i.e. loss in days-of-life would be significantly less than you would
expect.

Now, if you put value on days of human life (which you totally can do; first,
as a matter of policy, you won't pay a million dollars to give a 90 year old
another year of life, nor would you pay a billion to cure cancer in one
teenager; second, you do it every day when you take quantifiable risks to make
money or for convenience, everything from being a logger or a deep sea
fisherman, to merely driving)... if you put value on human life, how much
would this waste of life be worth? And how much waste of life is a worldwide
recession or depression going to produce - in direct deaths, days lost by
billions of people in s terrible economy, esp. if it gets to GD levels or
worse, or in the developing world where it definitely will if the economy
grinds to a halt; and on top of that in purely monetary terms, as people are
not able to do things from buying houses to merely making ends meet, depending
on the circumstances?

At this point everybody seems to admit it's beyond containment and the only
thing we are trying to do is flatten the curve and prevent the deaths. Is
entering a recession, or worse a depression and risking a total collapse
really worth it? I am starting to doubt it.

PS. Frankly this reminds me of plane crash reporting. Everybody is,
comparatively speaking, overreacting because the event is visible and
distinct, even though many more people die in cars every day.

~~~
nimblegorilla
Sidestepping the issue of how much a human life is worth you are also missing
that the death rate would skyrocket if everyone gets sick and needed treatment
at the same time.

~~~
drcross
It's also ignoring the fact that no one can be sick from any other cause
during the next nine months because hospitals will be at capacity.

------
superkuh
Not only that but they've removed the reserve requirements entirely for
"thousands" of banks. There are only ~4500 commercial banks in the USA total.
So that's at least a good fraction of them. These banks can now create money
out of nothing as much as they want.

~~~
jganetsk
Reserve requirements never really limited the ability of banks to create
money. Canada hasn't had reserve requirements for >20 years. Neither does the
UK, New Zealand, Australia, Sweden and Hong Kong. But all banks are indeed
subject to capital requirements, and that does limit money creation

Anyway, reserve requirements are generally not effective, including in the
USA. Much has been written about this. Banks are usually not reserve
constrained (especially post QE), there are many ways to game reserve
requirements, there are many ways to get reserves when you need them, and
central banks increase reserves systematically when they are in demand via
interest rate mechanisms.

[1]
[https://en.wikipedia.org/wiki/Reserve_requirement#Countries_...](https://en.wikipedia.org/wiki/Reserve_requirement#Countries_and_districts_without_reserve_requirements)
[2]
[https://en.wikipedia.org/wiki/Basel_III](https://en.wikipedia.org/wiki/Basel_III)
[3]
[http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_...](http://www.kreditordnung.info/docs/S_and_P__Repeat_After_Me_8_14_13.pdf)
[4]
[http://bilbo.economicoutlook.net/blog/?p=9075](http://bilbo.economicoutlook.net/blog/?p=9075)
[5] [http://macromusings.libsyn.com/marc-lavoie-on-canadian-
centr...](http://macromusings.libsyn.com/marc-lavoie-on-canadian-central-bank-
policy-real-time-payments-and-the-post-keynesian-tradition)

~~~
webninja
Reserve requirement were at 10%.

What happens now if someone deposits $100,000, the bank lends out $100k
because it can, and the someone tries to withdraw their money?

~~~
jganetsk
> Reserve requirement were at 10%.

This is very simplistic. 10% of what? Checking account deposits? Savings
account deposits? If savings and checking accounts have different reserve
requirements (and afaik they do), then depositors just moving money back and
forth between different kinds of accounts can change the bank's required
reserves. Banks also have flexibility on how they report their accounts.

Furthermore, the reserve requirement is enforced across a 2 week period. Banks
don't need to have all the required reserves all the time, just some of the
time.

And what if they don't meet the requirement? Is it that they are forced to
close by regulators, or do they just pay a penalty? If it's the latter, then
how often in practice do banks actually meet their requirements? Because it
might be cheaper to pay the penalty than to meet the requirement.

> What happens now if someone deposits $100,000, the bank lends out $100k
> because it can, and the someone tries to withdraw their money?

No one's doubting that banks need cash on hand to meet the demands of their
depositors, and that they need assets to use for net settlement with other
banks. But cash demand on any given day is probably much lower than 10% of
deposits (and afaik, the reserve requirements don't expect banks to hold
anywhere near 10% of deposits in cash). As for inter-bank settlement, there
are a lot of ways to get sufficient liquidity, including borrowing on the repo
market and the overnight market.

Holding reserves costs banks opportunity-cost (because they only earn
interest-on-reserves, which for most of US history was 0). And there is no
shortage of safe, liquid assets out there (US government debt). Even mortgage
debt is liquid. And there are tons of reserves sloshing around there, due to
QE.

So banks are definitely not reserve constrained... not even close. But banks
might be capital constrained. There's a big difference between reserve
requirements and capital requirements.

But in many cases, banks might be constrained by neither. They are probably
constrained by a lack of demand from lenders. There are not enough people to
lend to.

------
colinbartlett
My "high interest" savings accounts already took a recent haircut and this
will accelerate that. I understand that's the idea: make investing attractive
and savings unattractive. But for a regular joe like me, this is exactly the
time I want to be saving more so it stings.

~~~
perl4ever
What do you think is the difference between saving and investing??

~~~
nightski
Saving is preservation of capital whereas investing is growing capital. At
least that is my take.

~~~
perl4ever
Ok, but parent is lamenting that "saving" pays less than "investing". You're
saying that's implied by the (or your) definition so it seems like it would go
without saying.

~~~
wffurr
It's not that saving pays less than investing; it's that it's paying almost
nothing right now. Savings account interest rates are terrible, which is very
frustrating if you want to have some cash reserves.

I'm not going to put my 6 month emergency fund or the downpayment for my
future house into stocks and ETFs; they're too risky. It hurts to keep it in a
savings account paying less than 1% though, which is the alternative.

------
js2
SARS-CoV-2 doesn't care about monetary policy. Why not give money directly to
the people who need it? They'll spend the money right away.

I'm willing to sacrifice my 401(k) and retire on just SS if need be if my
government is willing to help everyone worse off than me.

~~~
sfj
Curious why you need to government involved? Why not just take your money out
of your 401(k) yourself? You'll suffer a penalty, but people are in need.

~~~
ShinyObject
Because uncoordinated individual action is ineffective against large scale
problems, which should be obvious right now.

~~~
sfj
If he gave his money to a few people in need, it would be effective for _them_
, wouldn't it? And probably better spent then after going through the tangled
mess of government bureaucracy. What more could you hope for?

~~~
js2
The GoFundMe model of health insurance and welfare doesn’t work. It’s my
government’s job. It’s why we have social security and medicare and Medicaid
and TANF, etc, in the first place. I can’t do it alone.

Promoting the general welfare is right in the preamble of our constitution:

> We the People of the United States, in Order to form a more perfect Union,
> establish Justice, insure domestic Tranquility, provide for the common
> defence, promote the general Welfare, and secure the Blessings of Liberty to
> ourselves and our Posterity, do ordain and establish this Constitution for
> the United States of America.

And in the letter of transmittal, Washington wrote:

> Individuals entering into society, must give up a share of liberty to
> preserve the rest. The magnitude of the sacrifice must depend as well on
> situation and circumstance, as on the object to be obtained. It is at all
> times difficult to draw with precision the line between those rights which
> must be surrendered, and those which may be reserved.

------
phkahler
IMHO this is a really bad idea. Let's hope they raise them slowly this time,
unlike 2007-8 when they went back up quickly and triggered mayhem.

~~~
michaelyoshika
Don't know why this is downvoted. Cutting interest only benefits the wall
street in the next couple months. Basically this admin only knows two things:
1, Cut interest rate 2, Cut tax And it doesn't care if the world explodes
after they step down.

~~~
imglorp
Most republican administrations have displayed that "get mine and get out"
behavior--causing recessions--since Teddy Roosevelt.

~~~
dcftoapv
Obama's admin let one of the world's foremost financial institutions fail and
caused a mass market panic / giant economic setback. Their reasoning was
entirely political and caused millions of people to lose their jobs. I'm
independent, but claiming that Republicans cause recessions is pretty ironic
considering the economic damage the last Democratic admin did.

~~~
sg47
Yes, Obama was President from 2000 to 2008 when the Fed let the subprime
lending happen with stupid monetary policies. The crash happened in 2008 when
Bush was still President.

A few days later, Lehman Brothers began to falter. Treasury Secretary Hank
Paulson, who in July had publicly expressed concern that continuous bailouts
would lead to moral hazard, decided to let Lehman fail. The fallout from
Lehman's failure snowballed into market-wide panic. AIG, an insurance company,
had sold credit default swaps insuring against Lehman's failure under the
assumption that such a failure was extremely unlikely.

[https://en.wikipedia.org/wiki/Economic_policy_of_the_George_...](https://en.wikipedia.org/wiki/Economic_policy_of_the_George_W._Bush_administration#Financial_crisis_and_Great_Recession)

------
shartshooter
Stopping production for a significant period of time was the first gut punch
covid is throwing. The second one seems to be landing on Europe and third will
be North America.

This means China will have a head start on getting supply up and running.

If the ROW is at a standstill in production, China will fill that gap which
could further displace a lot of production in the west.

China getting containment in order didn’t bounce back but also bounce ahead in
many places.

~~~
matt_the_bass
I think that may be plausible. But I also think that a lot of companies
relying on Chinese manufacturing all suddenly saw they had all their
manufacturing eggs in one basket.

I’m not suggesting that we should move manufacturing back to US, but we should
diversify. I’m seeing that some of my suppliers have already moved to other
Asian countries. I expect that diversification to continue.

~~~
shartshooter
Agreed. The fallout from this, beyond loss of life and impact to day-to-day,
will be really interesting and will seem obvious in hindsight.

------
majos
Dumb question: does this mean normal citizens can take out loans at near-0%
interest, or something close to that? I know credit card interest rates are
typically tied to “the fed rate” but a but higher?

~~~
bluedevil2k
The Fed rate is the interest rates that the Fed pays banks for their deposits
in the Fed. By lowering it, they’re incentivizing the banks to loan the money
and provide liquidity into the market. Since banks need to make a profit on
everything, they’ll loan the money out at a higher rate for things like
mortgage, car loans, and credit cards. Depending on the credit worthiness and
the collateral, the rates will differ (mortgage lower than an unsecured credit
card). Ultimately, the Fed lowering the rates will lower all interest rates,
but you’ll never get to 0% as a consumer.

~~~
xxpor
>but you’ll never get to 0% as a consumer.

Unless we see negative fed rates. Not that I think going so negative we see
consumer level 0% mortgages is likely.

~~~
jaggederest
Ironically, much of the tax advantage of owning vs renting is embodied in the
mortgage interest tax deduction. If there were no interest, obviously it would
be a good deal, but would not have the additional benefit of tax avoidance
that it does at present.

~~~
dlp211
Much of the tax avoidance from primary residence property has been removed
from the tax code already due to the TCJA. Not all of it, but most of it. It
also makes no sense to have a mortgage for the tax break. Rentals have
depreciation and the interest remains deductible as an expense on them there,
so that isn't really an issue.

~~~
aksss
Regarding tax avoidance from primary residence, what specifically? I can still
deduct mortgage interest. Are you talking about not itemizing some home
ownership expenses (like what?) because standard deduction increase? Just
wondering what I’m missing..

~~~
mobilefriendly
You can't deduct it with the new larger standard personal deduction, only if
you itemize. The Trump tax bill was a reform made the mortgage deduction moot
for about 20 million taxpayers.

------
matt_the_bass
I think the issue is cash-flow. So the govt should do things to mitigate cash-
flow. Such as pause rent/mortgage payments for 2 months for anyone that is out
of work due to this.

~~~
kshacker
It maybe works for mortgage as government deals with banks regularly.

But what if you rented from an individual owner who needs your rent?
Liberalized (without proving that you are looking for a job for let us say
next 3 months) unemployment insurance may be a better solution that keeps the
economy churning.

~~~
matt_the_bass
I agree it’s not as simple as only mortgage freeze. But if the land lord needs
the rent, probably that’s for their mortgage. But yes, I agree better
unemployment insurance is a good idea.

~~~
LeoTinnitus
A mortgage freeze would save the landlord and they wouldn't need the rent. If
they need the rent when their mortgage payment is frozen, then they're not a
good landlord. Chances are, they won't be a landlord for long when the lender
calls the loan due as well.

Let's not offload the onus on landlords personally responsibility to manage
their finances. If they don't have a mortgage to pay, they'll get by just fine
if they can't collect rent.

------
somewhereoutth
This feels like the end of an era - an era that ran from the fall of the
Berlin Wall up to the appearance of Covid-19. A global era, a largely peaceful
era, a profligate era, and an era of growing inequality. Who knows what comes
next...

------
daddypro
Does this interest rate transfer to lower mortgage rates? Is now a good time
to refinance loans?

~~~
adeelk93
It will, but not just yet. There’s too many people trying to refi right now
and supply can’t keep up with demand, so rates are higher than they should be.
Give it another 3-6 months and I wouldn’t be surprised if mortgage rates fell
by another 1%.

~~~
SomewhatLikely
There must be some floor based on default rates right? If 2% of people default
you can't go below 2%. And of course default rates go up in recessions.

~~~
adeelk93
I personally don’t think there’s a floor, all that matters is spread over
treasuries. If we go with your 2% number, that’s the spread between the
mortgage risk and the risk-free rate. If risk-free goes to -1%, then it’d make
sense for mortgages to go to 1%. This is something that already happens in
European countries. I don’t think there’s an inherent reason for the risk-free
rate to be a positive number.

On a different note, 2% default != 2% loss. Mortgages are secured by the
property, losing investors only a small fraction in foreclosure, so a 2%
default * 25% severity = 0.5% loss.

~~~
SomewhatLikely
All very good points! Thanks.

------
spodek
In the context of Covid, wouldn't lowering economic activity help keep people
home?

It seems more than "just" saving lives. Purely economically, wouldn't a
crashed health care system hurt the economy for a longer term?

~~~
sarah180
A depression can kill a _lot_ more people than COVID-19. This is why the state
of California just told young, healthy people to continue to visit restaurants
for now as long as tables are six feet apart.

This is not just an idea from thin air: they're doing lots of projections on
models of what is actually going to do more harm.

Think of it this way: if the economy shrinks by 30%, that means we have to
spend 30% less on everything. That's 30% less funding for wellness, hospitals
& emergency services. 30% less that people spend on self-care like gym
memberships. 30% less on gasoline to get to outdoor activities. If your food
budget drops by 30%, there's a good chance you're going to eat less healthy
foods. If people are going out 30% less often, you will see increases in both
physical and mental illness ,as we know that social contact improves health.

This is why the Twitter meme of "everybody panic and go home and stay there
for three weeks" may actually do a lot more harm than good even if it helps
slow the spread of COVID-19.

 _Unless you think your state and county leadership is incompetent, follow
their advice, as they are best informed about the local conditions._

------
dcftoapv
This is not going to help

\- It takes two years for monetary supply changes to fully propagate through
the economy

\- Cutting rates to 0% has not been effective in Japan or Europe

The fed does have a role to play here

\- They can provide liquidity to the market

\- They can serve as a backstop in a time of crisis

DC needs to get their shit together

\- Eliminating Trump's tariffs would do more to increase long-term investment
than cutting rates to 0%

\- They should have created targeted lending program to help businesses that
need short-term cash flow assistance yesterday; the next best time to do it is
right f __*ing now

~~~
paganel
As someone said before, I think this is more about sending a message, as in
"we're going to do whatever it takes". To be honest I don't know what the
future will hold from a financial/economics point of view, but imho this is an
once-in-a-century crisis.

~~~
dcftoapv
You're right, and they made a lot of changes that are necessary to keep the
global economy functioning over the next few months. I did not mean to imply
that they shouldn't be taking action.

I am very skeptical about cutting rates again. There are much more effective
actions that could be taken at the policy level. The fed is doing what it can,
but it doesn't have the right tools to lead the charge on this.

~~~
paganel
Yeah, this should definitely be teamed up with corresponding fiscal and trade
policies, the Fed cannot sort all of this mess by itself.

------
beefman
Original source:
[https://www.federalreserve.gov/newsevents/pressreleases/mone...](https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm)

------
josiahtu
Imagine if Trump had tried as hard to contain coronavirus as he’s trying to
pump markets rn

~~~
Animats
I have to agree. A full lockdown of the country with a return to normal at the
speed China achieved would do more than fooling around with interest rates. In
the current situation, there's not much productive a business can do with more
loans anyway.

~~~
Consultant32452
They won't come out and say it, but the plan is to let the virus slow roll
through the population of young/healthy to build up herd immunity. Some will
die, but it will be better in the long run. You can tell that's the plan as
they're talking about "flattening the curve." The area under the curve is the
same, but they want to allow it to slow roll through the population so we
don't over load the healthcare system.

Compare this "flattening the curve" plan to what China has done. They have
gone full on "shut down everything" and isolated the whole country. Their idea
is to eradicate the virus in the country. This is a worse plan because it
means they will not have herd immunity, though they may transition to that
plan as time moves forward.

This is why a full shutdown of the country is a bad idea. What happens then is
when you start opening the country up there's a whiplash effect and it starts
spreading rapidly again. For what it's worth, the UK publicly announced this
is their plan. I forget the stat but they said they plan to let 40 or 60% of
their population get it.

------
yalogin
Why is this warranted yet? This is a terrible that will only signal that the
fed is panicking and nothing else. There are no indications that the supply
chain is disrupted or that the economy is sputtering. It will happen at some
point in the next few weeks with or without the infusion and rate cuts now.
These things are much better done when warranted rather than now. As of now
it’s only a humanitarian crisis and only thing that will help is effective
communication to contain the pandemic. These infusions now will soon be
forgotten by the next bad news and the effect will not persist.

~~~
michaelyoshika
Earlier this weekend Trump said he could have fired Powell but choose not too.
Imagine you were Powell, what would you do?

~~~
peteradio
Somehow I doubt Powell is living paycheck to paycheck. Professionals shouldn't
cave under pressure that's why they make the big bucks. This is only a
rebuttal to the "what would you do?" I have no idea whether or not he was
pressured or if this is a good or bad move.

------
gdubs
We need fiscal stimulus, and we need it yesterday. Time to put money in
people’s pockets.

------
allovernow
Bank runs are coming. We are witnessing financial collapse and possibly the
early failure of the American empire. Futures trading was halted today. Market
will tank tomorrow. That's after a $1.5T stimulus. This is it.

~~~
HenryKissinger
This comment won't age well.

No bank run is coming, and we are not witnessing financial collapse, nor the
failure of the American empire.

~~~
allovernow
The fed had now pushed one $1.5T stimulus package and lowered rates to zero in
an absolutely desperate attempt to prop up a market when the entire country is
about to shut down - what are they propping up when no one is going to spend
any money?

Don't believe me? China. Iran. Italy. Spain. Austria. Multiple Nordic
countries. Nationwide shutdown. Coming to a state near you.

300MM people just panicked at the same time, and the stores have been empty
for two days. Imagine what's going to happen when they all discover fractional
reserve banking.

~~~
allovernow
Just documenting for the future: today the NYSE halted at least once and Dow
dropped 13%. PA announced shutdown of all non essential businesses.

