Most of the media are totally focused on the coronavirus and its implications early and late which includes the potential political impacts. Naturally, these are as polarized as everything else, or more.
For example, the Washington Post said that as “markets continued their dizzying downward spiral and other countries took strong measures to fight the outbreak the administration appeared to downplay the increasingly visible impacts and their potential for the future,” part of which Vice President Mike Pence blamed on “politics.” He said that “Politics is fine, but when it comes time to talk about pandemics you’ve got to get away from politics.”
Critics responded, “If only he could heed his own advice.”
The Post said that while President Donald Trump is calling on the Fed to cut interest rates “Fed officials and their global counterparts are staring down an economic threat unlike any they have ever faced.” Markets are looking 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.”
The New York Times reminded that “rates are historically low across advanced economies,” 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 to prod the economy. “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 wrote to clients.
America’s economy is particularly 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—shocks that might be particularly dire for small businesses that do not have big cash cushions: A few weeks of depressed sales can push them to the edge of ruin. And if companies close or downsize and jobs are lost, consumer spending would suffer even more.
Despite those threats, economists say that pre-emptive interest rate cuts might still be of some help. 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.
The U.S. central bank is in a better starting position than many of its peers, the Times says. 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%.
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 United States and globally though the projections vary widely as economists struggle to predict the virus’s trajectory and the resulting damage. Bank of America researchers reduced their forecast for 2020 growth in the United States by 0.1% on Friday, to 1.6% overall.
Other vulnerabilities also exist. 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.
Still, 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 so-called discount window, which can help to relieve any short-term shortage of funds among commercial banks.
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. But if that fails, fiscal policy could be more adept at targeting assistance to the places that need it—helping vulnerable businesses by issuing low-cost loans or other types of financing or directing funds to communities struggling in the wake of the virus.
Trump said on Saturday that there were no plans for an immediate fiscal response.
So, we will see. Clearly, there are several important steps government and bank officials need to take to deal with the current crisis — which continues to be a significant threat across the economy. Certainly, these difficult decisions and actions should be watched closely by producers as they evolve, Washington Insider believes.
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