Fed cuts interest rates in bid to stall a flailing US economy

The US Federal Reserve announced new measures on Sunday night designed to offer support to the US economy, leading to a short-lived boost in Bitcoin’s price

Fed cuts interest rates in bid to stall a flailing US economy
The first interest rate cut from the Federal Reserve since 2008, bringing home the seriousness of the recent downturn

The US’ Federal Reserve announced a quantitative easing stimulus package of $700 billion last night, sparking a temporary boost in Bitcoin’s price following the announcement. 

Quantitative easing means that the Fed will purchase government debt in the hope that pressure will be relieved from the US economy, which has been mired in recent weeks by the slowdown of the global economy.   

$500 billion of the stimulus package has been earmarked for treasury securities, whereas the remaining $200 billion is to be used to offset mortgage backed securities (MBAs) – the crash of MBA’s was responsible for the subprime mortgage financial crisis in 2008.

Following the announcement, the Fed’s chair, Jerome Powel, warned that,

“The economic outlook is evolving on a daily basis and it is depending on the spread of the virus… that is not something that is knowable.”

 The package will be put into action over the following months, signifying that authorities expect market downturn to continue into the short-term. In the UK for example, experts say the virus is expected to last until May 2021.

Zero interest

The Fed also slashed interest rates to zero percent; the first unscheduled cut from the Federal Reserve since 2008, bringing home the significance of the virus outbreak and the gloomy outlook on the world’s largest economy.

Greg McBridge, chief financial analyst at Bankrate.com said,

“Reducing interest rates to borrowers will ease the burden of existing debts slightly but is unlikely to spur the usual surge of borrowing as consumers and businesses batten down the hatches for a coming drop off in US economic activity.”

The latest round of measures can therefore be described as a hedge to mitigate against the unfolding decline of the economy, rather than an attempt to generate growth as rate cuts are traditionally used for.

Bitcoin enjoyed a boost following the announcement and fell just shy of $6,000, but then fell overnight to around the $4,500 level after optimism from the news died down.

Bitcoin could suffer further as new lockdown measures are announced in the US, such as the introduction of bans of gathering of more than 50 people, hampering the operations of numerous businesses.

One of the reasons cited for the recent crashes in Bitcoin is the prominence of derivative exchanges that allow leveraged trading, leading to fragile order books and shallow liquidity in a time when large investors are selling off their holdings to increase cash flow to offset their losses in other markets.

 

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