INSUBCONTINENT EXCLUSIVE:
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
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% amid worries that the outbreak could become a
Should that happen, the Fed and other central bankers are poised to respond
which investors and analysts took as a sign that officials would cut rates at their March meeting, if not earlier.
President Donald Trump
more aggressively, criticized it again Saturday, saying it was putting the United States at a disadvantage with other countries with
They are already negative across Europe and Japan, where infections are rapidly mounting
Officials in those economies had already been trying to coax households and businesses to spend amid lackluster growth by purchasing huge
quantities of bonds.
And it is unclear whether monetary policy is the ammunition needed to fight this particular type of economic threat, at
assuming that will help prod the economy
to stoke lending, pushing businesses and consumers to resume investing and buying.
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
susceptible to the threat posed by coronavirus, given that growth has largely been powered by consumer spending
Long-lasting quarantines could keep shoppers at home while fear of infection could prevent even those not quarantined from venturing out
The shock might be particularly dire for small businesses that do not have big cash cushions: A few weeks of depressed sales can push them
And if companies close or downsize and jobs are lost, consumer spending would suffer even more.
Florian Hense, an economist at German bank
preemptive action might still be of some help
If it seems that the coronavirus is going to have longer-lasting effects on consumer and business spending, lower borrowing costs can offer
And coordinating statements with other global central banks could help, he said
starting position than many of its peers
It managed to lift rates amid a stronger recovery, and borrowing costs are now set in a range of 1.5% to 1.75%
But it too has far less room to cut than before the Great Recession, when it slashed rates to near zero from above 5%.
Markets are betting
that officials will make a full percentage point in rate cuts by the end of the year.
But in many places, monetary policy has less room to
money into the economy quickly
But Beijing has been doing just that ever since the global financial crisis, producing an ever-rising mountain of debt that could grow even
taller as authorities force banks to respond to the current difficulties.
The Bank of Japan has few options left when it comes to juicing
growth, though its governor, Haruhiko Kuroda, has said it stands ready to act as needed
Its already-negative interest rates mean it is more expensive for Japanese banks to stow money away than to lend it to businesses, but banks
can have a hard time finding places to lend.
And in South Korea, where rates are low but positive, the central bank surprised investors by
leaving interest rates unchanged Thursday even as the country struggles with the largest known coronavirus outbreak outside China.
The
European Central Bank could offer loans with negative interest rates to eurozone banks, on the condition that they loan the money to
But benchmark interest rates are already at historic lows and Christine Lagarde, who became president of the European Central Bank in
November, has not encouraged hopes for a swift jolt of stimulus.
Because no one knows how bad the epidemic will get, it is unclear how much
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 United States and
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 is a risk that conditions could devolve if the virus spreads more quickly than
There is a growing consensus among economists that Europe is already headed into a recession and that weakness is likely to spread,
hampering growth in the United States as well.
Other vulnerabilities also exist
As in the 2008 crisis, financial risks threaten to aggravate any growth slump that materializes
Corporations owed $13.5 trillion to bond holders at the end of 2019, an all-time high
Half of the corporate bonds issued last year were rated just one notch above junk
If debt-laden companies fail to keep up with payments amid supply chain shutdowns and work closings, they could default, handing big losses
to the investors backing the loans and rippling through the financial system in unexpected ways.
Markets are already wary about such a
bankers and regulatory authorities erected around the financial system after the 2008 meltdown plunged their economies into the abyss.
It
should help that the system is stronger now than it was more than decade ago
Bank capital levels are much higher, meaning big banks that nearly toppled in 2008 can withstand major losses
And so far, there are no signs of the sort of funding pressures and cash crunches that defined the financial crisis.
The Fed has other tools
at its disposal should the financial system run into trouble: It can keep dollars flowing internationally and provide loans to banks through
the discount window, which can help to relieve any short-term shortage of funds among commercial banks.
Because monetary officials in Europe
and parts of Asia are short on tools to combat a potential crisis, the pressure is on governments to act instead
Central banks have urged their elected counterparts for years to move more decisively to prop up growth.
China has announced measures
including tax cuts for small firms
Italy has already promised to let businesses delay paying their taxes until sales get back to normal, a measure it has used in the past in
regions hit by earthquakes
In Germany, politicians have been hinting they may loosen limits on debt spending.
The Trump administration has been discussing another
round of tax cuts, but Trump said the plan would not be rolled out until later this year
Some Democratic lawmakers have asked the administration to think about interest-free loans for small business and other targeted spending,
but so far that has not gained any traction.
Whether fiscal policy can be more effective depends on how the economy reacts
For now, the best thing policymakers can do is stem the flow of infection with an effective public health response, economists say
issuing low-cost loans or other types of financing or directing funds to communities struggling in the wake of the virus.
Trump said