Fed Cuts Interest Rate to 0%: Three Articles Discussing Impact on CRE

CRE Could Benefit From The Fed Cutting Interest Rates To Near-Zero Levels - If Things Reopen – Via Bisnow

In an attempt to boost the vulnerable U.S. economy during the coronavirus pandemic, the Federal Reserve Sunday slashed interest rates by a full percentage point to nearly zero. That could put more cash in the pockets of real estate developers and consumers. 

In a series of statements Sunday afternoon, the Fed announced it would cut the federal funds rate from 1.25% to a range between 0% and 0.25%, a historic low last seen during the 2008 financial crisis. The U.S. central bank will also increase its Treasury securities holdings by at least $500B and its holdings of mortgage-backed securities by at least $200B, according to one of the Fed's statements. 

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States. Global financial conditions have also been significantly affected,” the Federal Open Market Committee said in a statement. “The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”

Lowering interest rates make it cheaper to borrow money, and the most tangible benefit to real estate could come to the housing sector with mortgage rates. The Fed said its moves Sunday were aimed at supporting the flow of credit to both households and businesses, which could also benefit commercial real estate companies looking to refinance loans.

“The Fed cutting its rate to near zero is a major ‘gift’ to owners of commercial real estate,” O’Connor Capital Partners President Joel Bayer said via email. “This will result in rates on real estate loans being lowered to interest rate levels which we have never seen in our lifetimes. Every existing loan that can be refinanced at a lower rate will be processed as soon as possible. This will translate into lower interest rate expenses and more net cash flow to the asset owner.”

Federal Reserve Cuts Rates to Near 0% to Counter Growing Economic Disruption: Board Also Pumps More Money Into Economy, Easing Rules on Bank Lending – Via CoStar

The Federal Reserve Board effectively lowered the federal funds borrowing rate to zero on Sunday, in an emergency action aimed at responding to the growing economic disruption brought on by the global coronavirus outbreak.

The Federal Open Market Committee decided to lower the target range for the federal funds rate to 0% to 0.25%, down from a target range of 1% to 1.25%.

The Fed said "it expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals."

The last time rates dropped this low was December 2018 when the world economy went into deep recession. The Federal Reserve did not raise rates again for seven years.

This weekend, the Fed said the effects of the pandemic would weigh on economic activity in the near term and pose risks to the economic outlook. Before raising rates again, the Fed said it "will continue to monitor the implications of incoming information for the economic outlook, including information related to public health, as well as global developments and muted inflation pressures."

The weekend move follows the Fed's monitoring of fast-moving economic developments. Policy makers noted the energy sector has come under stress. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2%, the Fed stated.

The Fed took other action as well over the weekend, saying it was prepared to use its full range of tools to support the flow of credit to households and businesses.

Policy makers announced they would increase the Fed's holdings of Treasury securities by at least $500 billion and its holdings of agency mortgage-backed securities by at least $200 billion. The government will also reinvest all principal payments from the Federal Reserve's holdings of agency debt and mortgage-backed securities.

In a related set of actions to support the credit needs of households and businesses, the Federal Reserve announced measures related to the discount window and bank capital and liquidity buffers.

Federal Reserve lending to depository institutions (the so-called "discount window") plays an important role in supporting the liquidity and stability of the banking system. The Federal Reserve is encouraging banks to turn to the discount window to help meet demands for credit from households and businesses at this time.

To help, the Fed lowered the primary credit rate by 150 basis points to 0.25% effective March 16, 2020.

The Federal Reserve is also encouraging banks to use their capital and liquidity buffers to lend to households and businesses that are affected by the coronavirus.

Since the global financial crisis of 2007-2008, U.S. bank holding companies have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers. The largest firms have $1.3 trillion in common equity and hold $2.9 trillion in high quality liquid assets, according to the Federal Reserve.

In light of the shift to ample reserves, the Federal Reserve has reduced reserve requirement ratios to 0% effective on March 26. This action eliminates reserve requirements for thousands of depository institutions and will help to support lending to households and businesses, the Fed said.

Bring Out the Big Guns - Via Investopedia

It was an unnaturally quiet and sombre Sunday evening when the Fed came in guns blazing to interrupt your Netflix binge and save the day. "The Federal Reserve is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals," said the statement.

 Here's the actions announced:

1. Federal funds rate lowered to 0-0.25% from 1-1.25%. This will be held till it is "confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals."

2. Purchases of $500 billion in Treasury securities and $200 billion in mortgage-backed securities

3. Reserve requirement ratios for banks cut to zero

4. Primary credit rate reduced by 150 bp to 0.25% to encourage banks use of discount window. Loan period extended to 90 days.

These moves, reminiscent of stop-gap measures the Fed took during the financial crisis of 2008-09, are aimed at ensuring that there is ample liquidity in the financial system, especially between banks. A tightening of lending as the economy heads into a likely recession could make the downturn even more severe. Mortgage rates are likely to lower once again after rising last week.