The Federal Reserve is doing what it can. On Tuesday, the central bank announced an emergency interest rate cut meant to shore up the economy and calm panicky financial markets in the face of growing fears over the novel coronavirus, which, if you believe the CDC, now “almost qualifies” as a global pandemic. It’s the first time U.S. monetary policymakers have slashed rates between their regularly scheduled meetings since the extremely dark days of 2008—which should give you a sense of the urgency attached to this move.
“The magnitude and persistence of the overall effect on the U.S. economy remain highly uncertain, and the situation remains a fluid one,” Fed Chair Jerome Powell said at a press conference after the announcement. “Against this background, the committee judged that the risks to the U.S. outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.” Translation: Nobody really knows how bad things might get, but the outlook is getting grimmer by the day, and it’s better to be safe than sorry.
It’s a reassuring decision that, like some of its other recent maneuvers, shows that the Fed has learned from its past mistakes. In 2008, the central bank likely exacerbated the Great Recession by refusing to cut interest rates until Lehman Brothers had already collapsed. It failed to act sooner because its board members were entirely preoccupied with the threat of inflation, and by the time they woke up, it was too late to prevent the worst. These days, the Fed is far more proactive about steering the economy away from potential catastrophe. When recession fears began to creep up last year thanks in part to President Donald Trump’s trade war, it cut rates. With the coronavirus, it’s once again springing into action sooner rather than later.
In the end, there’s only so much Powell and company can really do to help. First, interest rates are fairly low to begin with, which means the Fed doesn’t have all that much room to cut. Second, global pandemic creates problems that monetary policy cannot directly solve. Paring down rates will encourage more borrowing by businesses and possibly goose home sales. But it won’t fix supply chains that have been scuttled in China. It can’t help workers get back to work if they’re sick, or if they’ve been told to stay away from the office or off the factory floor. It can’t reopen theme parks or other tourist attractions that have to close for the sake of public health. Rather, it might be able to blunt the virus’s overall impact by boosting parts of the economy that can still function like normal (or close to it). But in the end, the economic toll the coronavirus takes is going to hinge on the public health response. If the U.S. can minimize the number of infections, the outcome might not be so severe. If the illness becomes widespread, as seems increasingly likely, it will do some damage. On Monday, the Organisation for Economic Co-operation and Development predicted that the outbreak could shave between 1.5 and 2.9 percentage points off global growth, depending on how far it spreads. And that’s assuming central banks take actions like the Fed just did.
But even if the Federal Reserve can’t necessarily save us from economic trouble entirely, it is at least trying to avoid making any downturn worse than necessary. It’s the monetary policy equivalent of promising to first do no harm.