With markets reeling from concerns over the coronavirus and plummeting oil prices, the US Federal Reserve took another step Monday to shore up markets. The Fed has more in its toolbox, but fiscal policy may also be needed to fill a gap in the US economy.

The Course of the Virus Will Matter

On Monday, the Federal Reserve Bank of New York boosted its overnight repurchase market operations from $100 billion to $150 billion. The action followed a 50-basis-point rate cut last week, and we expect more rate cuts ahead as the Fed tries to restore confidence. As we’ve said, the spread of the coronavirus—in addition to exacting a tragic human toll—is hurting economic growth, as preventative measures and behavioral changes create headwinds.

That means economic output is likely to decline for a period of time. Will it last weeks, months or quarters? Much depends on how far and fast the virus spreads, and on the extent that the government and businesses cut back in response. The fuel for a rebound exists…but the virus situation must stabilize first. Lower oil prices and lower interest rates—which should spark a refinancing wave—put money in consumers’ wallets, but it’s hard to envision people opening those wallets until the broader social situation stabilizes.

So, a rebound of some kind is likely, but not imminent.

How Low Is the Fed Willing to Go with Rates?

Faced with these questions, the Fed is moving aggressively to shore up financial markets. We’ve already seen interest-rate and liquidity measures, and we think the Fed will do more—a lot more if needed—to keep markets functional. That includes more rate cuts, certainly no later than the March 18 Fed meeting. The market is pricing the official policy rate at zero right now, and there’s a very good chance that’s accurate.