By Howard Schneider
(Reuters) – U.S. Federal Reserve officials launched an economic rescue plan in record time last month as the coronavirus pandemic spread, reaching decisions that may shape the global economy for decades to come in the space of a few frantic weeks.
On Wednesday afternoon the first detailed accounts of that debate will be released when the central bank publishes minutes of the meetings at which policymakers slashed interest rates back to zero, broadened access to U.S. dollars for foreign central banks, and restarted the massive asset purchases that have come to define monetary policy in a crisis.
If past practice is a guide, the minutes will provide detail on the Fed decisions announced on March 3 and March 15 after Fed Chair Jerome Powell convened emergency meetings as the scale of the pandemic and its risk to the U.S. economy became clear. The readout may also include their discussions of a slate of related actions that flowed from those two meetings.
Barely five weeks before the surprise rate cut on March 3, Powell and his colleagues had wrapped up their first meeting of the year on Jan. 29 with an air of cautious optimism. It looked like 2020 could be a year of steady growth and continued strength in the job market, a fresh updraft after a rocky 2019 in which the Fed cut rates three times to blunt the effects of the Trump administration’s trade war with China.
While broadly upbeat, policymakers did concede the novel coronavirus “warranted close watching,” according to minutes of that meeting released on Feb 19, the day before the U.S. stock market began a month-long crash that would cut its value by a third.
Even through mid-February policymakers felt the outbreak of the new coronavirus strain in China would likely have minimal spillovers to the rest of the world, perhaps disrupting the supply of parts and final goods from Chinese factories but not posing much in the way of a broader threat.
But the virus spread to the United States, the crisis deepened in China and elsewhere, and conventional economic models proved progressively less able to measure what was happening. The Fed then pulled its crisis playbook from a decade earlier off the shelf and began trying to stabilize financial markets that went from record highs to flashing red.
Most Fed officials now agree the U.S. economy is in a recession that may cut U.S. output by double digits in the second quarter and throw 20 million people or more out of work, at least temporarily, due to measures taken to contain the spread of COVID-19, the illness caused by the coronavirus.
Wednesday’s minutes may show just how dire a threat officials saw in those earliest moments and what spurred them to action.
ON THE FLY
The first move came on Feb. 28.
With the S&P 500 Index () tumbling 15% from its record high in just seven sessions and corporate credit spreads widening fast, Powell released an unscheduled statement at 2:30 p.m. pledging that Fed officials would “use our tools and act as appropriate to support the economy.”
The following Tuesday – March 3 – the Fed cut its benchmark lending rate by half a percentage point to a range of 1.00% to 1.25%.
“The fundamentals of the U.S. economy remain strong,” the U.S. central bank said. “However, the coronavirus poses evolving risks to economic activity.”
It was soon apparent that that would not be nearly enough and that officials could not wait until their next scheduled meeting – set for March 17 and 18 – to take further action.
On March 15, the Sunday before that meeting, the Fed took its boldest action since the height of the financial crisis.
The central bank cut interest rates by a full point back to near zero and reintroduced a pledge to leave them there for the foreseeable future. It promised to buy at least $700 billion of bonds, and slashed the interest rate on its lender-of-last-resort facility for banks to just 0.25%. It also announced a coordinated action with five other central banks to pump much-needed dollars into their jurisdictions.
How much beyond that will be covered in Wednesday’s minutes is unclear, but the Fed’s actions continued through the rest of the month. By the end of March, it would remove the lid on its bond purchases. It would also announce the launch of more than half a dozen new credit programs to keep key markets operating and even to get funds into the hands of smaller businesses excluded from international finance markets.