Coronavirus highlights limits of Fed's power
WASHINGTON — The Federal Reserve Board emerged once again Tuesday as a potential antidote to fears about a volatile financial market — this time sparked by the coronavirus outbreak — but both the head of the central bank and analysts warned that the Fed can only do so much.
The Fed's first emergency rate cut in over a decade appeared aimed at quelling a historic market sell-off sparked by the global coronavirus outbreak.
Chairman Jerome Powell faced increasing pressure to act in response to stock market volatility, much like the Fed used extraordinary measures to respond to the 2008-10 financial crisis. But Fed watchers took note of Powell's comments that the virus outbreak requires a "multifaceted response" as a sign that the central bank sees limits in its ability alone to contain economic fallout.
“Monetary stimulus is just one piece of it, but right now given where we are, a bigger piece of that has to be fiscal stimulus,” said Benjamin Dulchin, the director of the Fed Up Campaign at the Center for Popular Democracy. “I think what we learned from the last recession is that monetary stimulus can be effective, but it's not very targeted, whereas fiscal stimulus really is targeted and can be far more effective.”
Meanwhile, following the Fed's action, some expressed optimism that fears about coronavirus will not translate into financial stability concerns.
"This is not like 2008 when banks did not trust other banks, which triggered systemic instability," Jaret Seiberg, an analyst at Cowen Washington Research Group, said in a note Tuesday. "This is about the level of economic activity."
Read more: Complete coverage of the coronavirus impact
And in his press conference, Powell said there is “no evidence” that the virus is creating the kind of burden on borrowers that might move regulators to declare that banks should allow loan. He added that should circumstances change, he believes regulators would step in.
“When it comes to those sorts of issues, the supervisors will be working with banks to ensure that they work with their borrowers,” Powell said. “So I can imagine us doing those sorts of things, but those things are not upon us at the moment.”
Powell said noted that a rate cut "will not reduce the rate of infection" and "won’t fix a broken supply chain."
"We don’t think we have all the answers," he said. "But we do believe our action will provide a meaningful boost to the economy."
Treasury Secretary Steven Mnuchin praised the Fed’s move, saying Tuesday afternoon that the central bank “did the right thing in getting ahead of this,” and that the coronavirus “is going to have an impact in the short term on the economy.”
Although the economic impact of the virus is inevitable, the Fed’s monetary policy will not be able to completely cushion the blow on its own, some industry experts say.
While the Fed is in charge of monetary policy, the responsibility for any kind of fiscal stimulus package would rest with Congress and the White House.
WalletHub CEO Odysseas Papadimitriou said that the Fed’s rate cut is “better than nothing,” but agreed that the federal government should be prepared to do more.
“If the coronavirus spreads throughout the economy and the fear we’re seeing in markets really manifests itself in hard economic data, that would only compound our problems,” he said in a statement. “Consumer spending will go down if people stay home because of the coronavirus. That in turn will hit a number of industries particularly hard … and that could lead to a domino effect.”
Mark Hamrick, senior economic analyst for Bankrate.com, said the Fed’s move shouldn’t settle investors’ fears about the virus for precisely the reasons Powell outlined — stopping the spread of the virus is up to health professionals, businesses and government.
“It remains to be seen whether strong fiscal measures will be approved by Congress and the president to help stimulate the economy and fund the health response,” said Hamrick.
Some have even argued that the Fed’s historically low interest rates could limit its ability to use monetary policy as a tool to ward off economic stress, said Dulchin.
“The question is really now, what will the federal government do to in an effective targeted way to support demand and try to hold off a recession?” he said. “If one quarter of the answer is lowering rates, fine, but the other three quarters of the answer has to be fiscal stimulus, and that is what is frustrating, is that is directly in the power of the White House and the Congress.”
Karen Petrou, managing partner at Federal Financial Analytics, said the Fed’s move was likely motivated by several factors. One may be a belief that the central bank waited too long to use its monetary policy levers to shore up markets right before the 2008 financial crisis.
But another is a realization within the agency that, rightly or wrongly, the centeral bank is being turned tot to do something, and it will be under enormous political pressure if it doesn’t deliver.
“I don't in any way believe that the Fed is responding directly to political pressure, but they have to feel it, too,” Petrou said. “It's an extraordinarily awkward position, that, if at all possible, they'd rather not be in.”
Petrou noted that since the bank regulatory agencies are independent, further decisions concerning loan forbearance and other measures can be made without outside pressure.
“This is a banking agency decision,” Petrou said. “The agencies deserve being independent. This is exactly an instance of when their independent status should be first and foremost in their thinking. What is the real crisis, not what the people want to pretend it is.”
Hannah Lang contributed to this article.