The US Federal Reserve’s 50-basis point rate cut on Tuesday had a whiff of the “shock and awe” not felt since the dark days of the financial crisis. Bigger and swifter than most expected, and made between regular meetings, the move sends a strong signal — underlined by the unanimous vote of the rate-setting committee — that the Fed will not hesitate to do what it can to contain the financial and economic repercussions of the coronavirus crisis.
Many have, however, questioned how much it can really achieve. Economists have pointed out that monetary policy cannot address the supply shock of people falling ill and not being able to travel or work. Stocks reacted more with a wobble than with euphoria.
Ignoring the naysayers, the Fed has seen the insurance value of a prompt stimulus. Even if the epidemiological developments are beyond its control, the financial repercussions, especially broader confidence and expectations in the economy, are not. The rate cut itself should go some way towards offsetting any retrenchment in consumption and investment demand from fearful households and businesses.
As important is what the Fed is leading them, and markets, to expect. This will be seen as the Powell put: Fed chair Jay Powell is letting the economy know that when things get rocky, he has its back. The reduces uncertainty around the strength of the policy response. As the global financial crisis showed, if fear takes hold in credit markets and business financing seizes up, it is essential to have a forceful monetary policymaker.
It probably helps both Mr Powell and the markets’ reading of his reaction that he has, over time, communicated his growing appreciation of the good that stimulative policy has been doing in marginalised corners of the labour market. That suggests he is less worried than some central bankers about the need to “normalise” monetary policy, which makes it easier to make a dovish turn now.
The Fed’s statement hints there could be more to come. It should now make sure it is ready to deliver. One must hope the central bank is working on complementing general loosening with tools that directly target businesses — in particular small and medium-sized ones — facing credit constraints because of how the epidemic has hit their cash flow. Having buttressed overall business and consumer confidence, this is where the Fed must direct its attention next.
Mr Powell and his colleagues’ move came at the heels of a G7 big economies’ communique from finance ministers and central bank chiefs vowing to take appropriate measures but falling short of internationally co-ordinated action. If the Fed cut puts pressure on its counterparts, it may achieve the multilateral co-ordination US politics currently abhors. Even more useful would be if it encouraged the Trump administration to up its game and take the epidemic as seriously as America’s central banks does.