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Fed Slashes Interest Rates to Near Zero

The move was not enough to calm futures trading or Asian and European markets, which dropped dramatically following the news.

By Colm Quinn, the newsletter writer at Foreign Policy.
Federal Reserve Board Chairman Jerome Powell testifies during a hearing in front of the Senate Banking, Housing and Urban Affairs Committee on February 12, 2020.
Federal Reserve Board Chairman Jerome Powell testifies during a hearing in front of the Senate Banking, Housing and Urban Affairs Committee on February 12, 2020. Sarah Silbiger/Getty Images

Here is today’s Foreign Policy brief: The Fed makes a major intervention, Benny Gantz will have the first shot at forming a government in Israel, and the latest coronavirus news.

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Powell Announces Dramatic Rate Cut and $700 Billion Injection

The U.S. Federal Reserve made another major intervention in the U.S. economy on Sunday by announcing a dramatic interest rate cut and a new $700 billion dollar round of quantitative easing.

The Fed was widely expected to announce an interest rate cut this week, but the swiftness of the move, and the dramatic interest rate drop of 100 basis points—taking the target range for the federal funds rate down from the 1 to 1.25 percent range to the 0 to 0.25 percent range shows the urgency with which the Fed views the economic situation after seeing massive market volatility in the past week.

Speaking on the phone to reporters, Fed chief Jerome Powell said that the Fed’s actions were taken to soften the impact of a fiscal quarter in which economic growth could stall, “We do know that the virus will run its course and that the U.S. economy will resume a normal level of activity. In the meantime, the Fed will continue to use our tools to support the flow of credit,” he said.

Markets react to Fed intervention. U.S. stock futures dropped 5 percent after the Fed news in a sign that investors do not think this will be enough to stop further economic pain. Futures hit “limit down,” the maximum allowable drop before the market opens. In Asia, markets dropped across the board and London’s FTSE 100 opened with a 6 percent decline in early trading.

Is a recession looming? Speaking to ABC News, U.S. Treasury Secretary Steve Mnuchin played down talk of a recession, “I think we’re in the second of nine innings and we will use whatever tools we need to make sure the economy and hardworking Americans will get through this,” he said. Several experts disagreed with his take; four former chief economists at the International Monetary Fund told the Financial Times that a global recession—strictly defined as global economic growth falling below 2.5 per cent—was already happening.

What We’re Following Today

Gantz tries to form government in Israel. Israeli President Reuven Rivlin has given Benny Gantz, the leader of the Blue and White party, permission to seek to form a government after Gantz was able to secure recommendations from 61 members of the Knesset. That number includes parties that have virtually nothing in common such as as the far-right Yisrael Beiteinu and the Arab Joint List coalition; the latter said it would not join a coalition led by Gantz but could give it the support needed to govern. Gantz now has six weeks to form a government.

Meanwhile, Prime Minister Benjamin Netanyahu’s corruption trial—scheduled to begin this week—has been delayed until May 24 in light of the coronavirus crisis.

Coronavirus vaccine spat. Berlin and Washington are providing differing explanations after a story in the German newspaper Welt am Sontag claimed that the Trump administration is trying to persuade a German company developing a coronavirus vaccine to move its operations to the United States. The U.S. ambassador to Germany, Richard Grennell, called the German newspaper’s story “wrong,” and the company in question, CureVac, dismissed rumors of any forthcoming acquisition.

France and Spain lock down. Spain has enacted measures similar to those in force in Italy, calling for a near total lockdown on activity in order to deal with the coronavirus outbreak. All non-essential businesses, including bars and restaurants, have been ordered closed and residents have been ordered to stay at home unless they are conducting essential activities like traveling to work or buying food. France has enacted similar measures as French Prime Minister Édouard Philippe advised residents to stay at home except for food shopping and exercise. Despite these restrictions, French municipal elections continued as planned on Sunday.

The World This Week

Representatives from the European Union and the United Kingdom are due to meet on Wednesday for three days of negotiations on the future of the E.U.-U.K. relationship. Negotiations were due to take place in London, but are likely to be conducted by other means, including teleconference, because of the coronavirus outbreak.

On Friday, members of the Organization of American States will hold an election to decide who will be the next secretary-general of the group. The incumbent, Luis Almagro, will face two other candidates: Peruvian Hugo de Zela, and Ecuadorian María Fernanda Espinosa.

On Sunday, voters in Guinea will vote for a new national assembly and decide in a referendum whether President Alpha Condé can seek another term as leader of the West African nation. Under current law, Condé would have to leave office in December. The vote was initially set for March 1, but was delayed following pressure from international observers over voter roll irregularities.

Keep an Eye On

Nigeria gas explosion. An explosion at a gas processing plant in Lagos killed 15 people and destroyed over 50 residential buildings, emergency services said. According to the Nigerian National Petroleum Corporation, a truck apparently hit gas cylinders, igniting the explosion. The incident led to a halt in pumping operations on the Atlas Cove-Mosimi pipeline.

Democratic primaries. On Tuesday, Democratic party voters in Arizona, Florida, Illinois, and Ohio will have their say on who should be their nominee for president, with former Vice President Joe Biden leading against his rival Sen. Bernie Sanders in the polls. These states are going ahead with their primaries even as two states, Louisiana and Georgia, announced that they would be postponing their votes due to coronavirus fears.

Taji attacked again. Three U.S. service members and two Iraqis were wounded on Saturday in a rocket attack on a military base in Taji, Iraq. It’s the second rocket strike on the base in the past week. An attack last Wednesday killed three service members, two from the United States and one from the United Kingdom. “You cannot attack and wound American service members and get away with it, we will hold them to account,” a Pentagon spokesman said following Saturday’s attack.

Odds and Ends

Wuhan Zall, a soccer club in China’s top division, is an example of the global nature and rapid spread of the coronavirus. The team made headlines in February when the outbreak in their city left them stranded in Spain, where they had traveled for pre-season training. Now that Spain is bearing the brunt of the coronavirus epidemic, the team is headed back to China for safety—although the squad is traveling first to Shenzhen, not Wuhan. “Things are well over there [in China] now,” José Gonzalez, the team’s Spanish coach, told the Associated Press. “The Chinese league will likely start at the beginning of May. We will have to enter quarantine when we arrive, so the sooner we leave, the better.”

That’s it for today.

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Colm Quinn is the newsletter writer at Foreign Policy. Twitter: @colmfquinn