Infection rate is ‘only curve that matters’ for economy
BAD DAY FOR MARKETS: Rout indicates the Fed is running out of tools
The Federal Reserve moved boldly on Sunday to try to contain the economic damage from the coronavirus pandemic, slashing its benchmark interest rate to near zero and pledging to buy $700 billion in Treasury and mortgage-backed securities in an emergency action aimed at driving down long-term rates and calming jittery markets.
The dramatic action, a signal that the economy needs crisis-response measures, sent stocks plunging Monday in the worst rout since the 1987 market crash. The Dow Jones Industrial Average lost nearly 3,000 points, or 13 percent, while the broad S&P 500 and technology-heavy Nasaq Composite sustained similar losses, each shedding about 12 percent. Oil fell 10 percent to settle at $28.70 a barrel, the lowest since the bottom of the last oil bust in early 2016.
The historic rout, analysts said, was driven by investors’ anxieties that the lower interest rates — even near zero — would not have much impact on the deepening economic damage caused by the coronavirus pandemic and worries that the Fed has few other tools left should economic conditions worsen. The new coronavirus causes a disease called COVID-19, which has infected more than 4,660 in the United States and killed at least 85, according to Johns Hopkins University. The university reports 85 cases of COVID-19 in Texas.
“If quarantine measures mean that the larger part of the economy is shut down,” said Jacob Kirkegaard, a senior fellow at the Peterson Institute for International Economics, a nonpartisan economic policy research group in Washington, “does it really matter that the interest rate is now a percentage point lower? No.”
The U.S. and global economies
are facing the biggest threat since the 2008 financial crisis that wiped out millions of jobs and trillions of dollars in wealth. The Dow has plunged more than 30 percent since peaking in February at about 29,000. Oil is down more than 50 percent since the beginning of the year.
Analysts at the New York bank Goldman Sachs forecast that the U.S. economy will shrink 5 percent in the second quarter, which would be the biggest contraction since the end of 2008. Many economists put the chances of a recession — roughly defined as two consecutive quarters of negative growth — at above 50 percent this year.
While economists generally praised the Fed for acting quickly, they said lowering interest rates, which aims to entice consumers and businesses to borrow and spend, will have a limited effect as investors focus on the coronavirus and the drastic steps national, state and local governments are taking to control it. The likelihood that infection rates continue to steepen — with no clear end in sight — is the fear investors are trading on right now, experts said.
“The only curve that has any economic relevance today is not the swap curve, not the 10-year Treasury curve,” said Kirkegaard, referring to financial instruments. “The only curve that matters is the infection rate. And that’s not something the Fed can do.”
With rates at zero, the
Fed’s options are narrowing. That’s why economists are calling for action from Congress and the Trump administration to boost spending to aid industries, from airlines to restaurants, in order to stop job losses as business activity grinds to a halt due to social distancing measures and quarantines.
“If businesses close, you need the support very quickly so that businesses don’t go bankrupt and the workers living paycheck to paycheck can pay their rent and mortgages,” said Brian Rose, a senior investment strategist for UBS, an investment bank. “If you let a lot of businesses go bankrupt and let people lose their jobs, this could become a more sustaining downturn.”
Countries around the world, including the U.S., are implementing travel bans as health officials urge people to avoid unnecessary air travel. Major airlines are cutting as much as half of their flights.
Cities across the U.S. are attempting to slow infection rates in their localities by shutting down bars and restaurants. By Monday morning, the three largest cities in the U.S. — New York, Los Angeles and Chicago — had ordered bars, restaurants and other gathering places closed to slow the spread of the coronavirus. Houston, the fourth-largest city in the country, and Harris County closed bars and limited restaurants to takeout and deliveries, a measure beginning Tuesday morning, Mayor Sylvester Turner said.
Local actions will do their part to help slow the spread of the virus, experts said, but states and cities are unlikely to offset the economic fallout of those actions.
“Because of the nature of the virus, it can easily overwhelm the resources of state and local governments,” Rose said. “They don’t have the kind of funding that they need to deal with the situation. We need a federal response.”
The difference between this quickening downturn and the last downturn more than a decade ago is that financial and credit markets, though at times creaky, are still operating, matching
borrowers to lenders and investors to assets. The mild downturn that began at the end of 2007 spiraled into the worst recession in 70 years when markets froze and businesses could not get the credit and cash they needed to operate.
Because the pandemic is a more conventional demand shock, policymakers ought to be able to eventually lift demand through monetary policy and federal spending. That’s unlike 2008, when the problem began in financial markets, paralyzing the economy.
“If we can keep banks and financial markets intact, we can return to a more normal state of the economy as soon as we get past the worst (of the outbreak),” said Peter Rodriguez, an economist and the dean of Rice University’s Jesse H. Jones Graduate School of Business.
To do that, Congress will need to authorize a flood of spending to prevent longlasting economic damage from measures such as the restaurant and business shutdowns, experts said.
This is not the time to be worried about the federal deficit, economists said.
“We have to take all the necessary measures to prevent this crisis from spreading, and yes, the economic pain in the short term will be very considerable, but hopefully you’ll end up saving a lot of lives,” said Kirkegaard, of the Peterson Institute for International Economics. “We are eventually going to reopen, and we’d rather be able to restart the economy with a lot more people alive than not.”