The US Federal Reserve will have one job next week: convince the world they are doing everything they can to blunt the coronavirus impact on the economy even if their tools aren’t the best ones for the job.
In the eight weeks since Fed Chair Jerome Powell presided over the central bank’s last scheduled policy meeting, the outbreak has transformed the global economy, forcing the Fed to make an emergency half-point cut to its benchmark lending rate and inject $1.5 trillion into financial markets last week. At their two-day meeting starting Tuesday, analysts say the question is not whether the Fed will cut again – that is seen as a certainty – but how low they will go.
“Do they go to zero immediately or wait till April? That’s a hard call,” Diane Swonk, chief economist at Grant Thornton, told AFP.
She cautioned that “cutting rates alone literally cannot cure what ails us,” but “it can help on the other side, it can help blunt the blow.” The outbreak of COVID-19 has already hammered Wall Street, putting it back into a “bear market” for the first time in 11 years and wiping out over $16 trillion in equity worldwide and still counting.
The Fed twice boosted cash injections into financial markets and last Thursday announced a massive and unprecedented $1.5 trillion in additional funding last week alone.
In addition, it broadened purchases of US Treasury debt, moves likened to the “quantitative easing” strategy used during the 2008 global financial crisis.
But analysts say those moves are not enough by themselves to inoculate the economy. That will require the help of politicians wielding the power of the purse to aid consumers and businesses, and public health authorities fighting the virus.
“If this were a movie, the Fed would be playing the role of a supporting actor,” said David Wilcox, a former Fed advisor now with the Peterson Institute for International Economics in Washington. Since breaking out in China late last year, the COVID-19 virus has killed more than 5,700 people and spread globally, with cases topping 150,000, according to an AFP tally.
Countries have taken extraordinary steps to halt its spread, including closing borders and shuttering businesses. US President Donald Trump imposed a ban on travelers from Europe.
At its last scheduled meeting in January, the Fed issued a statement mostly focused on domestic economic issues and held its benchmark interest rate steady, though Powell said officials were closely monitoring the virus.
But on March 3, the central bank implemented the first emergency cut since 2008 as the outbreak worsened, bringing the benchmark down to 1.0-1.25 percent. The CME Group puts the odds of another cut at the meeting concluding Wednesday as a certainty, with almost all respondents saying the central bank will drop the target rate to 0-0.25.
A cut to zero would bring monetary policy back to where it was in the global financial crisis, when banks collapsed and the housing market crashed, sending the US into recession.
While some economists worry about the Fed using all of its firepower so soon, others argue that the lessons of 2008 are that waiting will only prolong the pain.
