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US-ECONOMY-RATE-BANK-HEALTH-VIRUS
Raging virus makes zero rates a possibility as Fed meets
WASHINGTON, March 15, 2020 (BSS/AFP) – 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.
– ‘The Fed is on the job’ –
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.
But this decline is different, the result of a full-stop in factory
production and consumer spending as the virus transforms daily life, and
experts say only a massive spending program can cushion the blow to
businesses and workers.
On Friday, Trump announced $50 billion in spending to stop the virus and
purchases of oil to stockpile, while Democrats controlling the House passed a
relief package.
Wilcox said health authorities fighting the outbreak along with
politicians are on the frontlines of defending the economy.
A rate cut, the effects of which would not be felt for months, cannot do
much more than demonstrate “the Fed is on the job,” he said.
– Is a recession here? –
While the Fed is ill-suited to attack the supply problems caused by the
virus, Swonk said it can still act to ensure banks keep lending as businesses
struggle.
“Even though rate cuts alone can’t re-open factories, or make people go to
the store, they can help ease the financial strain at a time when financial
strains could literally push people through the ice,” she said.
Economist Joel Naroff warned that the US may already be back in a
recession, though he predicted it would be a shallower one than during the
global financial crisis.
As for what the central bankers decide next week, “it matters not,” he
said, because rates are already very low and keeping liquidity flowing
through cash injections is more important.
BSS/AFP/MSY/0827 hrs