Summary

  • Central Banks Spring Into Action
  • The Coronavirus Adds To Europe’s Ailments

When the pace of events accelerates and perception travels faster than information, it’s sometimes difficult to keep up. Just a few days after we issued our expectation for interest rate cuts this spring, the U.S. Federal Reserve reduced its benchmarks by fifty basis points. It was the Fed’s first move of more than a quarter-point, and the first move outside of formal meetings, since 2008.

The urgency surrounding the decision was likely informed by the spread of the COVID-19 virus and the reaction of public health officials and the private sector. Restrictions on human movement and assembly have hindered production processes and taken a toll on service businesses around the world. With testing beginning in earnest in the United States, it seems likely that the number of reported cases will mount, as will the steps taken to contain the contagion.

It may be a few weeks before we see the accumulated business interruptions reflected in the normal flow of data, but the escalating number of anecdotes suggests upcoming economic announcements could be negative. That shortens the time frame for policy makers to react and reassure.

Fed Chairman Jerome Powell promised on February 28 to “use our tools and act as appropriate to support the economy.” European Central Bank (ECB) President Christine Lagarde said the bank was “ready to take appropriate and targeted measures.” Comparable statements from other central banks, and communication from G-7 finance ministers, clearly suggested a coordinated effort to combat the spreading malaise.

Weekly Economic Commentary - 03/06/20 - Chart 1

Unfortunately, central banks don’t have much room to reduce interest rates. Those that do have chosen to use it: the Fed, the Bank of Canada and the Reserve Bank of Australia have already moved, and the Bank of England will almost certainly act at (or before) their next meeting in late March. But other monetary authorities will have to rely on what we used to call unconventional policies, like quantitative easing or support programs for lending.

“Despite this week’s aggressive move, the Fed may have more work to do.”