Fed Slashes Interest Rate to Near Zero and Launches 700Bn QE, Bitcoin Hovers Near $5k

Matthew Lam   Mar 16, 2020 08:15

The recent stock market crash has caused a wide “Red Sea” of losses for equities and cryptocurrencies. Bitcoin price has once dipped below $4000 and now hovers near $5000.

Interest Rate Cut

In an attempt to stimulate the US economy amid coronavirus pandemic, the Federal Reserve (“the Fed”) decided to slash the main interest rate to near zero together with the purchase of $700 billion Treasury securities.

The Fed has cut the benchmark federal fund rate by one percentage point, which is now at a range of 0 – 0.25%. According to the Fed, the decision is consistent with its goal to support economic activity, robust labor market conditions, and restore the inflation rate to the Committee’s symmetric 2% objective. The Fed intends to maintain the new target range until they feel confident that the U.S. economy is stabilized amid coronavirus pandemic, to achieve its maximum employment and price stability goals.

700 billion quantitative easing program

Regarding the $700 billion purchase of Treasury securities, the Fed announced to increase its holding of Treasury securities by at least $500 billion and its holding of agency mortgage-backed securities by at least 200 million. Besides, the Fed will reinvest all principal payments from the Federal Reserve’s holding of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions are part of the Fed tools to smoothen the flow of credits to businesses and households.

US President Donald Trump welcomed the latest move by the Fed, “It makes me very happy and I want to congratulate the Federal Reserve. That’s a big step and I’m very happy they did it.”

Cutting of primary credit rate

The Fed also announced to lower the primary credit rate by 150 basis points (bps) to 0.25%, which is comprised of a 100 bps reduction of the target range of the Federal funds rate and 50 bps reduction in primary credit rate. The rate cut is complemented by letting banks borrow from the discount window for as long as 90 days, prepayable and renewable by the borrower on a daily basis. The Fed believes such moves can encourage depository institutions to help meet demands for credit from households and businesses.

To enhance the US Dollar liquidity with other central banks

The Fed coordinated with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank to enhance the liquidity of USD via the standing US dollar liquidity swap line arrangements.

As agreed by the central banks, the pricing on the standing U.S. dollar liquidity swap arrangement will be the US dollar overnight index swap (OIS) rate plus 25 bps. Apart from the current offer of 1-week maturity operations, the foreign central banks also agreed to begin offering USD weekly in each jurisdiction with an 84-day maturity. This aims to ease the strains on the supply of credit to households and businesses domestically and internationally.

What happened to Bitcoin?

BTC 0316.JPG

Source: CoinMarketCap

Following the announcement by the Fed, Bitcoin price once topped $5824, but then hovered near $5000. Despite the quantitative easing by the Fed, investors are still concerned with global economic uncertainty caused by the coronavirus, such as nations to close their borders, coronavirus “herd immunity” plan by the UK government and quarantine on arrivals by various countries.


 Image via Shutterstock

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