DID THE FED EXPEND ITS MONETARY AMMUNITION TOO EARLY?

Written by Jerome Teo

Combatting the Economic Downturn of the Coronavirus

On Tuesday, 5 March 2020, The Federal Reserve System (Fed), the US’ central banking system, announced an interest rate cut of 50 basis points to 1 – 1.25 percent, the first emergency rate since the 2008 financial crisis.

This was done as an attempt to curb the economic risks posed by the increasing spread of the coronavirus. This came as a surprise as the Fed Open Market Committee was only supposed to meet 1-2 weeks later on 17 – 18 March, having said in late January that they did not expect to have any changes in the rate. 

However, the markets didn’t seem to respond optimistically to this, with the Dow dropping 2.9% that day. Chief global strategist at JPMorgan Funds, David Kelly has even said that he “would not be surprised if within the next few months the Fed went back down to zero.

The Limits of Monetary Policy

“(The rate cut) cannot reduce the rate of infection, and it won’t fix a broken supply chain,” said Chair of the Fed, Jerome Powell. 

The coronavirus is a public health emergency where rate cuts do not greatly impact consumer purchases or factor’s import and export of materials. However, the rate cuts can ease financial conditions by potentially reducing the interest rate on debt payments and market volatility. 

The Fed only has 4 more quarter-point moves before the rates reach the zero percent floor. This would drastically decrease the Fed’s power similar to the situation in the 2008 financial crisis, where they may only be left with unconventional tools such as quantitative easing and forward guidance. 

In light of this limited power, lawmakers have passed an emergency aid bill worth $8.3 billion

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