The Atlanta Journal-Constitution
As markets tumble, remedies uncertain
Fed chair signals possible rate cut, but it may not help much.
The coronavirus panic that sent stock markets tumbling this week has triggered calls for the federal government to intervene, relying on traditional playbooks that the Federal Reserve, Congress and the White House have used in numerous previous crises.
This time, though, the usual approach might not work.
Typically, the Fed responds to economic trouble by lowering interest rates to make credit easier to obtain. It also can offer loans to banks via the “discount window” or buy large quantities of U.S. Treasury securities to offset any general tightening in financial conditions. Congress, meanwhile, can approve new spending or tax cuts to flood the economy with money.
But the best remedy for the coronavirus — which has sickened more than 83,000 people worldwide and killed nearly 3,000 — could lie beyond Washington’s immediate powers.
“Central banks don’t make vaccines,” said David Kotok, chairman of Cumberland Advisors.
The Dow Jones industrial average plunged 1,000 points Friday morning, swinging widely throughout the session. It closed down 357 points, or 1.4 percent. The Standard & Poor’s 500 index shed 0.8 percent while the Nasdaq rallied to end flat.
The 10-year Treasury yield, a key marker in global finance, also hit a record low Friday, a sign that investors are fleeing equities for the safety of bonds.
All three major U.S. indexes finished in correction, which signals a 10% reversal from recent highs and heightens investor worries of a runaway slide. The Dow and the S&P 500 had their worst weeks since the 2008 financial crisis, according to S&P Dow Jones indices.
The renewed selling intensified calls for the Fed to rescue the economy from an unforeseen shock. The medical emergency already has disrupted global production networks, curtailed air travel and hobbled economies in Asia, Europe and the Middle East. With medical experts urging Americans to prepare for serious disruptions in their daily lives, pleas for early action are coming from Wall Street and some former members of the Fed’s rate-setting committee.
Federal Reserve Chairman Jerome Powell pledged Friday that the Fed will “use our tools” to support the economy, an effort to ease fears over the viral outbreak and a strong signal of a likely rate cut, perhaps at its next meeting March 17-18.
But this time, the Fed’s classic crisis-fighting tools may not be as effective. Economists call episodes like the epidemic or the Sept. 11, 2001 terrorist attacks an “exogenous
shock,” meaning an unpredictable development that arises from outside the economy or financial system yet has significant economic consequences.
Recessions typically occur after the Fed has begun raising interest rates to head off incipient inflation or after warning signs such as widespread layoffs or falling equipment orders. Likewise, as the economy gradually deteriorates, officials in the White House or on Capitol Hill can make plans to ramp up government spending or to cut taxes.
In this case, the coronavirus emerged with no warning and, after initially appearing to be confined to China, swept multiple countries — with more expected to follow.
If the United States suffers a serious outbreak and people stay home fearing possible contagion, cutting interest rates would probably do little to convince them to return to work or go out to shop or dine. “This is a very tough one for the Fed to deal with,” said Dean Baker, senior economist at the Center for Economic and Policy Research.