The Fed is hoping to encourage businesses and consumers to borrow and spend during a time when financial markets are crashing, institutions including Broadway theaters and Disneyland are shutting down, travel is being curtailed, schools and universities are closing, and workers are being furloughed.

The Fed's rate has returned to an all-time low

Fed policymakers announced Sunday that they decided to lower the federal funds rate — the influential short-term interest rate that the central bank controls — to a range of 0% to 0.25%, from the previous range of 1% to 1.25%.

The rate's new level ties the all-time low set during the financial crisis in 2008. At that time, the Fed dropped its rate to zero — and kept it there for seven years.

Banks use the federal funds rate to set the prime rate, the interest rate they charge their best customers. Since the Fed cut its rate by one full percentage point, banks are likely to do the same with the prime, meaning we're likely to see it fall from 4.25% to 3.25%.

That will could have big benefits for consumers, because many other rates are tied to the prime, including credit card interest rates, rates on adjustable-rate mortgages, and the rates on home equity lines or credit, or HELOCs.

Fed rate cuts also indirectly influence the movement of other interest rates throughout the economy, like mortgage rates — which already have hit record lows — and the rates on personal loans.

Other new action by the Fed

Facade on the Federal Reserve Building in Washington DC
Paul Brady Photography / Shutterstock

In addition to cutting the federal funds rate to the bone, the Fed has gone back to buying up bonds — another of the maneuvers it used to nurse the economy back to health after the Great Recession.

The central bank says it will purchase $500 billion in Treasury bonds and $200 billion in mortgage-backed securities to help bring down long-term interest rates for businesses and consumers.

And, policymakers are slashing the Fed's “discount window” rate, which is the interest it charges banks for short-term loans, by one and a half percentage points: from 1.75% to just 0.25%.

"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," the Fed's statement said.

Altogether, the actions show that the "Fed is wide awake at the wheel," says Diane Swonk, chief economist for the accounting giant Grant Thornton.

"The @federalreserve can’t stop the worst from happening," Swonk said on Twitter, noting that America is primarily dealing with a health crisis. "They can only help us to better weather the storm and contain damages so that we have a chance of emerging on the other side."

About the Author

Doug Whiteman

Doug Whiteman

Editor-in-Chief

Doug Whiteman is the editor-in-chief of MoneyWise. He has been quoted by The Wall Street Journal, USA Today and CNBC.com and has been interviewed on Fox Business, CBS Radio and the syndicated TV show "First Business."

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