Amid fear and fallout, the outbreak tests limits of economies worldwide
Federal Reserve officials and their global counterparts are staring down an economic threat unlike any they have ever faced, as markets look to them to contain the fallout from a rapidly spreading virus with limited ammunition and tools ill-suited to deal with broken supply chains and quarantined consumers.
No playbook exists for dealing with the economic threat posed by the coronavirus, which has already shuttered factories and impaired companies across the globe.
The outbreak has sickened more than 85,000 people and has been spreading rapidly outside of China, where it first surfaced. Japan, South Korea, Iran and Italy are all battling major outbreaks, in many cases imposing quarantines to contain the spread. That has disrupted supply chains, forcing companies like Apple and Toyota to idle factories in China and grounding airlines as consumers stayed home, sending stock prices plunging.
In the best case scenario, the virus is quickly contained and the global economy suffers a hiccup. The American economy is in its 11th year of an expansion, and many economists believe that the underlying fundamentals remain strong and that growth will continue, helping to insulate the United States from a big shock.
Investors are not so sanguine. Stock markets bled through their worst week since 2008, with the S&P 500 index falling 11.5 percent amid worries that the outbreak could become a worldwide pandemic. Should that happen, the Fed and other central bankers are poised to respond. The Fed chairman, Jerome Powell, issued a rare statement Friday saying that policymakers would “act as appropriate” to support the economy, which investors and analysts took as a sign that officials would cut rates at their March meeting, if not earlier.
President Donald Trump said Saturday that the Fed needed to move swiftly.
“I think the Fed has a very important role, and especially psychological,” Trump said, after indicating that Powell’s statement was insufficient. “We should have the lowest interest rates. We don’t have the lowest interest rates; the Fed rate is higher.”
The president, who has repeatedly faulted the Fed for not slashing rates more aggressively, criticized it again Saturday, saying it was putting the U.S. at a disadvantage with other countries with negative interest rates.
“Our Fed should start being a leader, not a follower,” he said. “Our Fed has been a follower.”
But lowering borrowing costs will only get the global economy so far: Rates are historically low across advanced economies. They are already negative across Europe and Japan, where infections are rapidly mounting.
And it is unclear whether monetary policy is the ammunition needed to fight this particular type of economic threat, at least at the outset. Policymakers cut rates to ward off an economic downturn — or contain one that has already arrived — by making it cheaper to borrow money, assuming that will help prod the economy.
But a rate cut can do little to restart production lines hobbled by workers placed in quarantine or told to stay home. Nor can central banks do much to lure tourists back to Venice, Italy, or encourage people to fly again. And because monetary policy works slowly — a rate cut today takes more than a year to fully filter through the economy — it is better suited to dealing with protracted slumps.
“We would rather have a vaccine than a rate cut and fully recognize that monetary policy is not optimized for addressing this type of shock,” Krishna Guha and Ernie Tedeschi of Evercore ISI wrote in a note to clients.
Florian Hense, an economist at German bank Berenberg, said central bankers can at best mitigate the economic impact, not contain it.
“You can’t bring people back to factories. How are you going to convince consumers to leave their houses and buy goods?” Hense said.
Despite those shortcomings, economists say that pre-emptive action might still be of some help. Rate cuts — or even hints that they are coming — can help calm markets and keep credit flowing. If it seems that the coronavirus is going to have longer-lasting effects on consumer and business spending, lower borrowing costs can offer some reprieve by stoking demand.
“I think it would send a huge signal if the Fed was willing to cut rates, even a quarter of a point, on an inter-meeting basis,” Narayana Kocherlakota, formerly president of the Federal Reserve Bank of Minneapolis, said Friday. And coordinating statements with other global central banks could help, he said. “This is obvi ously a global shock, so it’s reasonable to think about a global response.”
Because no one knows how bad the epidemic will get, it is unclear how much stimulus will be needed — which is part of the reason this is such uncertain territory for the Fed and other central banks. If contained quickly, the coronavirus could deal a short-term blow to growth and economies could quickly snap back. But the chances of a painful slump are rising as the virus spreads.
Forecasters have cut economic growth estimates in the U.S. and globally, though the projections vary widely as economists struggle to predict the virus’ trajectory and the resulting damage. Bank of America researchers reduced their forecast for 2020 growth in the U.S. by 0.1 percent Friday, to 1.6 percent overall.
Moody’s Analytics said this week that the odds of a recession had risen to 4 in
10. Capital Economics pegged it much lower, at 1 in
10.
“There are plenty of risks in terms of financial stability, and also a lot of geopolitical risks,” said Lorenzo Codogno, former chief economist for the Italian Treasury, who is now an independent consultant in London. “The situation is intrinsically fragile. In my view, the coronavirus could be the tipping point.”