Rate cuts alone won't help the world ride out Covid-19 crisis

March 13, 2020 16:37
The US Federal Reserve slashed interest rates in an emergency move last week, but the move failed to quell panic-selling on Wall Street amid the global coronavirus outbreak. Photo: Reuters

The Covid-19 pandemic has triggered panic-selling in stock markets around the world. In the United States, the Federal Reserve intervened and slashed interest rates by half a percentage point last week, the biggest single cut since the 2008 financial tsunami, in a bid to limit the economic damage from the coronavirus outbreak.

Meanwhile, in the United Kingdom, the Bank of England also resorted to an emergency 50 basis-points reduction in its key rates this week. And the Chancellor of the Exchequer, Rishi Sunak, rolled out a £30 billion stimulus package in a desperate bid to rescue the economy.

Investors are now awaiting further rate cut by the Fed at the US central bank's regular policy meeting next week. The expectations are that policymakers will trim the benchmark rate by another half a percentage point, matching the size of the unscheduled March 3 easing.

Now, we come to the question: how much of a difference will such monetary policy moves really make to the economy?

We should bear in mind that the ongoing adversity didn’t stem from the normal ups and downs of the world economic cycle, but a sudden and wholly unforeseen factor.

The interest rate cuts might help ease the credit environment, but they may not be able to address all the problems caused by the spread of the coronavirus.

Since the federal funds rate is already very close to the zero level, the only thing left in the Fed’s toolbox to stimulate the economy is perhaps a relaunch of quantitative easing.

Even so, the continued and massive fluctuations on Wall Street, despite the emergency rate cut, can be viewed as a vote of no-confidence cast by the market on the monetary policy.

Investors around the world are well aware that interest rate cuts or even fresh QE moves are no more than a quick fix amid the coronavirus crisis.

Given the situation, we believe the only feasible way to alleviate the economic repercussions of Covid-19 is for governments around the world to provide direct financial support for businesses and individuals who are struggling to keep their heads above water.

US President Donald Trump said this week that he is looking at a possible payroll tax cut, together with other measures, to help American workers and boost the economy.

The steep losses on Wall Street even after such words tell us that the market is anything but confident in Trump's ability to beat the virus and guide his country through the tough times ahead.

This article appeared in the Hong Kong Economic Journal on March 12

Translation by Alan Lee with additional reporting

[Chinese version 中文版]

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Hong Kong Economic Journal