Coronavirus: Can Fed rate cut save the economy? Few say no

Asian Pacific countries coronavirus3844328 / Pixabay

The Federal Reserve lowered its benchmark rate by 50 basis points on Tuesday. Such a move was largely expected to protect the economy from a downturn caused by the coronavirus outbreak. Although it remains to be seen how far the rate cut will help in the economic recovery, many believe the Fed rate cut won’t be effective in fighting the coronavirus.

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Fed rate cut to fight coronavirus: effective or not?

Many economists and strategists believe monetary policy tools such as interest rate cuts may not help much in saving the global economy from coronavirus or COVID-19 aftershocks. Nomura analysts echoed a similar sentiment in a report on Thursday.

“The idea is deeply ingrained in financial markets that, when there is a major global economic downturn, central banks quickly come to the rescue with aggressive policy rate cuts,” they said, according to CNBC. “Markets are anticipating the same policy playbook even though this COVID-19-induced economic downturn is different from others.”

Further, the analysts noted that the current economic downturn is not the result of any financial event. Rather, the downturn is due to the outbreak, and thus, the best immediate response would be health security policies.

Some say interest rates were already low. Thus, a further cut may fail to encourage companies to boost spending and investments.

Companies are “building liquidity right now, they don’t want to go out to borrow and make investments for the future. They’re kind of running for the hill,” MUFG Union Bank Managing Director and Chief Financial Economist Chris Rupkey told CNBC’s Squawk Box Asia on Friday.

Rupkey does not recommend any further cut in rates.

May not spur growth

Blackstone Chief Executive Stephen Schwarzman also believes the Fed rate cut will not help much in fighting coronavirus disruptions.

“I don’t really know how these interest rate cuts will help fight the coronavirus. I think the way markets were off afterwards, was an indicator of how the stimulated economy will work in such a context,” Schwarzman said, according to ET.

Further, he said the Fed tried to instill confidence among investors through the rate cut, but it did not work as expected. He noted that lower interest rates will make it even more difficult for financial institutions to survive.

Schwarzman said the rate cut will not necessarily result in growth, but it does hurt savers and retired people. It also hurts financial institutions as they lose on the yield curve, and their capital does not grow at the rate they want.

A few economists also believe monetary policy won’t be able to address the supply shock due to people becoming ill and being unable to travel or work. Even Fed Chairman Jerome Powell himself admitted that the rate cut won’t reduce the infection or “fix a broken supply chain.”

Fiscal policy may prove more effective

CNBC’s Scott Wapner tweeted earlier this week that the CEO of one of the globe’s largest investment firms told him that the Fed moved too early with the rate cut and that investors were hoping for more in terms of fiscal policy.

Similarly, a few experts believe increased government spending could play a bigger role in countering the adverse impact of the outbreak. For instance, Hong Kong and Singapore have launched measures targeted at sectors and even companies hit by the outbreak. Experts recommend measures like subsidies for workers and wage support for those in sectors hit by the outbreak, such as tourism and hospitality.

Nathan Sheets, chief economist at PGIM Fixed Income, admitted that Congress’ $8.3 billion fiscal package could send a better signal that authorities are taking the virus seriously.

A few agree that the rate cut won’t fix the broken supply chains, but they believe that it will act as a safety net by ensuring that the financial environment remains supportive and there is enough liquidity in the system.

“Bottom line is that the Fed’s action is helpful, but it’s not a panacea,” Sheets told CNBC in an email.

The Fed’s rate cut of 50 basis points was the biggest since 2009 and the first from the Fed between normal meetings since 2008. The Fed and other central banks around the globe are expected to reduce interest rates further. Earlier this week, Powell said the rate cut will not help reduce the infection rate, but it could provide a boost to the economy.

President Donald Trump also wants the Fed to cut rates. In a recent tweet, he said the Fed “must further ease and, most importantly, come into line with other countries/competitors.”

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About the Author

Aman Jain
Aman is MBA (Finance) with an experience on both Marketing and Finance side. He has worked as a Risk Analyst for AIR Worldwide, and is currently leading VeRa FinServ, a Financial Research firm. Favorite pastimes include watching science fiction movies, reviewing tech gadgets, playing PC games and cricket. - Email him at amanjain@valuewalk.com

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