WASHINGTON – The Federal Reserve took massive emergency action on Sunday to help the economy weather the coronavirus by lowering its benchmark interest rate to near zero and declaring it would buy $ 700 billion worth of treasury and mortgage bonds.

The Fed’s surprise announcement indicated that it was concerned that the viral epidemic could dampen economic growth in the months to come and that it was ready to do everything in its power to counter the risks. He cut his key rate by a full percentage point – to a range of zero to 0.25% – and said he would hold it until he was convinced the economy can survive. a virtual halt to economic activity in the United States.

The central bank will buy at least $ 500 billion in Treasury securities and at least $ 200 billion in mortgage-backed securities. This amounts to an effort to ease the market disruptions that have made it more difficult for banks and large investors to sell Treasuries as well as to keep long-term borrowing rates low.

The new purchases will be similar to several rounds of “quantitative easing”, or QE, the Fed conducted during and after the Great Recession to strengthen the financial system and the economy. President Jerome Powell, on a conference call with reporters, declined to characterize the Fed’s new purchases as QE. He said their main objective was to ensure the smooth functioning of credit markets. But new bond purchases could also lower lending rates and help the economy, as QE did, he said.

Powell also warned that the economy would likely contract in the April to June quarter due to widespread coronavirus closures and a large pullback in consumer spending. He noted that the necessary measures taken across the country to stem the epidemic – avoiding travel, shopping and mass gatherings – are inherently harmful to the economy, which he said was in good shape before the virus does not strike.

“The virus is having a profound effect on people in the United States and around the world,” said Powell. While the main response will have to come from healthcare providers, “economic policymakers must do what we can to alleviate the hardships caused by economic disruptions, and support a rapid return to normal once they are over. past. “

The president added that Sunday’s sharp interest rate cut would help businesses that need credit now, but would be particularly helpful once the virus outbreak largely subsides. He said there was no set timeline for the $ 700 billion in securities purchases and that they would occur as needed.

“We are going to come into force starting tomorrow,” said Powell, “and… do what we need to do to get the market working again.”

The Fed is also joining coordinated global action, with the Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank, to provide cheap dollar credit to banks. This move aims to ensure that foreign banks continue to have access to the dollars they lend to foreign companies.

In his audio press conference on Sunday night, Powell explained the Fed’s actions, in part, noting that “when tensions arise in the treasury market, they can spill over into financial markets and across the board. economy”.

Powell said the Fed acted on Sunday after deciding to meet this weekend instead of its policy committee meeting scheduled for Tuesday and Wednesday this week. He also said the central bank decided not to release its usual quarterly projections for the economy and interest rates this week because the virus is changing the economic picture too quickly to make such projections useful.

US equity futures began to fall after the Fed’s announcement. Futures for the S&P 500 index fell 4%, while futures for the Dow Jones Industrial Average fell 3.7%. The price of gold rose 3.5%.

Overall, the Fed’s massive response is aimed at keeping financial markets functioning and lending to businesses and consumers. Otherwise, as incomes run out for countless small businesses that have suddenly lost customers, these employers could be forced to lay off workers or even seek bankruptcy protection in some cases.

“This is a breakthrough moment” for the Fed, said Mark Zandi, chief economist at Moody’s Analytics. “They throw everything they have on it. I feel like they must be nervous that the credit system isn’t working. Properly. They’re trying to build trust.

By aggressively cutting its short-term benchmark rate and pumping hundreds of billions of dollars into the financial system, the Fed’s measures on Sunday served as a reminder of the emergency action it took at the height of the financial crisis . Starting in 2008, the Fed cut its key rate to near zero and held it for seven years. The central bank has now lowered that rate – which influences many consumer and business loans – to its all-time high.

The move drew rare praise from President Donald Trump, who attacked the Fed as late as Saturday, as he often did, for not acting quickly or aggressively enough.

“It makes me very happy,” Trump said as he opened a White House briefing on the coronavirus. “I think the people and the markets should be very excited.”

A dissenting Fed member Loretta Mester, chairman of the Cleveland Federal Reserve, voted Sunday against the one-point rate cut, in favor of a half-point cut. She backed the Fed’s other actions to stimulate credit markets.

As more businesses across the country see their incomes dwindle while consumers stay at home, many will seek short-term loans to maintain their payrolls. The Fed said it had abandoned its normal requirement that banks hold cash equal to 10% of its customers’ deposits, allowing banks to lend that money instead. He also said that banks can use additional cash buffers that were imposed after the 2008 financial crisis for loans.

“This confirms that the Fed sees the economy falling (…) very sharply” towards recession, said Adam Posen, president of the Peterson Institute for International Economics.

Yet with the spread of the virus causing a large halt to economic activity in the United States, the Fed faces an extremely daunting task. Its tools, intended to ease borrowing rates, facilitate lending and build confidence, are not ideally suited to compensate for a fear-induced disruption in spending and travel.

“We have to hope that the Fed guarding against events, let alone other central banks, pushes the economy in the right direction,” Posen said. “Most of the work to stimulate and prevent lasting economic damage has to be done on the fiscal side. That’s the nature of this shock. ”

Posen said he favors actions that are outside the Fed’s purview, such as granting sick leave and compensating workers in quarantine and renewing bank loans to small and medium-sized businesses hit hard by the epidemic.

“This won’t be the quick fix that saves everything,” said Timothy Duy, a University of Oregon economist who tracks the Fed, but sends a signal to Congress that the economy needs stimulus measures. emergency.

Duy predicted that the Fed would follow through with other measures, including possibly changing its inflation target to allow for more stimulus and more support for commercial paper – the short-term notes that companies issue to cover their expenses.

“I don’t think they’re done yet,” Duy said.

Earlier Sunday, Treasury Secretary Steven Mnuchin said the central bank and the federal government have tools to support the economy.

Mnuchin also said he doesn’t think the economy is still in a recession. However, many leading economists have said they believe a recession has already happened or will soon be. JPMorgan Chase predicts the economy will contract at an annual rate of 2% in the current quarter and 3% in the April-June quarter.

“I don’t think so,” Mnuchin said, when asked if the United States was in a recession. “The real issue is what economic tools are we going to use to make sure we get through this. “

Two weeks ago, in a surprise move, the Fed sought to offset the brakes of disease on the economy by cutting its short-term rate by half a percentage point – its first cut between policy meetings since the financial crisis.

Fed policymakers have widely accepted research that once its benchmark rate approaches zero, it would be more beneficial for the economy to cut it to zero rather than a quarter or half a point above. above. This is because it takes time for rate cuts to make their way into the economy. So if a recession threatens, faster action is more effective.

On Thursday, the central bank announced that it would provide $ 1.5 trillion in short-term loans to banks. The central bank will provide liquidity to interested banks in exchange for treasury bills. The loans will be repaid after one or three months.

This program was an early response to signs that the bond market has been disrupted in recent days as many traders and banks sought to offload large sums of Treasuries but failed to find enough willing buyers. This stalemate has reduced bond prices and increased bond yields – the opposite of what typically happens when the stock market plunges.

AP Economics authors Paul Wiseman and Martin Crutsinger in Washington and David McHugh in Frankfurt, Germany contributed to this report.