“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 ISI wrote in a note to clients.
America’s economy is 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 to the edge of ruin. And if companies close or downsize and jobs are lost, consumer spending would suffer even more.
Florian Hense, an economist at the German bank Berenberg, said central bankers can at best mitigate the economic impact, not contain it.
“You can’t bring people back to factories. How are you going to convince consumers to leave their houses and buy goods?” Mr. Hense said.
Despite those shortcomings, economists say that pre-emptive action might still be of some help. Rate 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.
“I think it would send a huge signal if the Fed was willing to cut rates, even a quarter of a point, on an inter-meeting basis,” Narayana Kocherlakota, formerly president of the Federal Reserve Bank of Minneapolis, said Friday. And coordinating statements with other global central banks could help, he said. “This is obviously a global shock, so it’s reasonable to think about a global response.”
Article source: https://www.nytimes.com/2020/02/29/business/economy/coronavirus-central-banks-economy.html
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