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Coronavirus Tests Limits of Central Bank Firepower Coronavirus Tests Limits of Central Bank Firepower
(2 months later)
Federal Reserve officials and their global counterparts are staring down an economic threat unlike any they have ever faced, as markets look to them to contain the fallout from a rapidly spreading virus with limited ammunition and tools ill-suited to deal with broken supply chains and quarantined consumers.Federal Reserve officials and their global counterparts are staring down an economic threat unlike any they have ever faced, as markets look to them to contain the fallout from a rapidly spreading virus with limited ammunition and tools ill-suited to deal with broken supply chains and quarantined consumers.
No playbook exists for dealing with the economic threat posed by the coronavirus, which has already shuttered factories and impaired companies across the globe.No playbook exists for dealing with the economic threat posed by the coronavirus, which has already shuttered factories and impaired companies across the globe.
The outbreak has sickened more than 86,000 people and has been spreading rapidly outside of China, where it first surfaced. Japan, South Korea, Iran and Italy are all battling major outbreaks, in many cases imposing quarantines to contain the spread. That has disrupted supply chains, forcing companies like Apple and Toyota to idle factories in China and grounding airlines as consumers stayed home, sending stock prices plunging.The outbreak has sickened more than 86,000 people and has been spreading rapidly outside of China, where it first surfaced. Japan, South Korea, Iran and Italy are all battling major outbreaks, in many cases imposing quarantines to contain the spread. That has disrupted supply chains, forcing companies like Apple and Toyota to idle factories in China and grounding airlines as consumers stayed home, sending stock prices plunging.
In the best case scenario, the virus is quickly contained and the global economy suffers a hiccup. The American economy is in its 11th year of an expansion, and many economists believe that the underlying fundamentals remain strong and that growth will continue, helping to insulate the United States from a big shock.In the best case scenario, the virus is quickly contained and the global economy suffers a hiccup. The American economy is in its 11th year of an expansion, and many economists believe that the underlying fundamentals remain strong and that growth will continue, helping to insulate the United States from a big shock.
Investors are not so sanguine. Stock markets bled through their worst week since 2008, with the S&P 500 index falling 11.5 percent amid worries that the outbreak could become a worldwide pandemic. Should that happen, the Fed and other central bankers are poised to respond. The Fed chair, Jerome H. Powell, issued a rare statement on Friday saying that policymakers would “act as appropriate” to support the economy, which investors and analysts took as a sign that officials would cut rates at their March meeting, if not earlier.Investors are not so sanguine. Stock markets bled through their worst week since 2008, with the S&P 500 index falling 11.5 percent amid worries that the outbreak could become a worldwide pandemic. Should that happen, the Fed and other central bankers are poised to respond. The Fed chair, Jerome H. Powell, issued a rare statement on Friday saying that policymakers would “act as appropriate” to support the economy, which investors and analysts took as a sign that officials would cut rates at their March meeting, if not earlier.
President Trump said on Saturday that the Fed needed to move swiftly.President Trump said on Saturday that the Fed needed to move swiftly.
“I think the Fed has a very important role, and especially psychological,” Mr. Trump said, after indicating that Mr. Powell’s statement was insufficient. “We should have the lowest interest rates. We don’t have the lowest interest rates; the Fed rate is higher.”“I think the Fed has a very important role, and especially psychological,” Mr. Trump said, after indicating that Mr. Powell’s statement was insufficient. “We should have the lowest interest rates. We don’t have the lowest interest rates; the Fed rate is higher.”
The president, who has repeatedly faulted the Fed for not slashing rates more aggressively, criticized it again on Saturday, saying it was putting the United States at a disadvantage with other countries with negative interest rates.The president, who has repeatedly faulted the Fed for not slashing rates more aggressively, criticized it again on Saturday, saying it was putting the United States at a disadvantage with other countries with negative interest rates.
“Our Fed should start being a leader, not a follower,” he said. “Our Fed has been a follower.”“Our Fed should start being a leader, not a follower,” he said. “Our Fed has been a follower.”
But lowering borrowing costs will only get the global economy so far: Rates are historically low across advanced economies. They are already negative across Europe and Japan, where infections are rapidly mounting. Officials in those economies had already been trying to coax households and businesses to spend amid lackluster growth by purchasing huge quantities of bonds.But lowering borrowing costs will only get the global economy so far: Rates are historically low across advanced economies. They are already negative across Europe and Japan, where infections are rapidly mounting. Officials in those economies had already been trying to coax households and businesses to spend amid lackluster growth by purchasing huge quantities of bonds.
And it is unclear whether monetary policy is the ammunition needed to fight this particular type of economic threat, at least at the outset. Policymakers cut rates to ward off an economic downturn — or contain one that has already arrived — by making it cheaper to borrow money, assuming that will help prod the economy. That’s what the Fed did in the financial crisis in 2008, when it lowered rates to near zero and bought government-backed bonds in an attempt to stoke lending, pushing businesses and consumers to resume investing and buying.And it is unclear whether monetary policy is the ammunition needed to fight this particular type of economic threat, at least at the outset. Policymakers cut rates to ward off an economic downturn — or contain one that has already arrived — by making it cheaper to borrow money, assuming that will help prod the economy. That’s what the Fed did in the financial crisis in 2008, when it lowered rates to near zero and bought government-backed bonds in an attempt to stoke lending, pushing businesses and consumers to resume investing and buying.
But a rate cut can do little to restart production lines hobbled by workers placed in quarantine or told to stay home. Nor can central banks do much to lure tourists back to Venice or encourage people to fly again. And because monetary policy works slowly — a rate cut today takes more than a year to fully filter through the economy — it is better suited to dealing with protracted slumps.But a rate cut can do little to restart production lines hobbled by workers placed in quarantine or told to stay home. Nor can central banks do much to lure tourists back to Venice or encourage people to fly again. And because monetary policy works slowly — a rate cut today takes more than a year to fully filter through the economy — it is better suited to dealing with protracted slumps.
“We would rather have a vaccine than a rate cut and fully recognize that monetary policy is not optimized for addressing this type of shock,” Krishna Guha and Ernie Tedeschi of Evercore ISI wrote in a note to clients.“We would rather have a vaccine than a rate cut and fully recognize that monetary policy is not optimized for addressing this type of shock,” Krishna Guha and Ernie Tedeschi of Evercore ISI wrote in a note to clients.
America’s economy is susceptible to the threat posed by coronavirus, given that growth has largely been powered by consumer spending. Long-lasting quarantines could keep shoppers at home while fear of infection could prevent even those not quarantined from venturing out. The shock might be particularly dire for small businesses that do not have big cash cushions: A few weeks of depressed sales can push them to the edge of ruin. And if companies close or downsize and jobs are lost, consumer spending would suffer even more.America’s economy is susceptible to the threat posed by coronavirus, given that growth has largely been powered by consumer spending. Long-lasting quarantines could keep shoppers at home while fear of infection could prevent even those not quarantined from venturing out. The shock might be particularly dire for small businesses that do not have big cash cushions: A few weeks of depressed sales can push them to the edge of ruin. And if companies close or downsize and jobs are lost, consumer spending would suffer even more.
Florian Hense, an economist at the German bank Berenberg, said central bankers can at best mitigate the economic impact, not contain it.Florian Hense, an economist at the German bank Berenberg, said central bankers can at best mitigate the economic impact, not contain it.
“You can’t bring people back to factories. How are you going to convince consumers to leave their houses and buy goods?” Mr. Hense said.“You can’t bring people back to factories. How are you going to convince consumers to leave their houses and buy goods?” Mr. Hense said.
Despite those shortcomings, economists say that pre-emptive action might still be of some help. Rate cuts — or even hints that they are coming — can help calm markets and keep credit flowing. If it seems that the coronavirus is going to have longer-lasting effects on consumer and business spending, lower borrowing costs can offer some reprieve by stoking demand.Despite those shortcomings, economists say that pre-emptive action might still be of some help. Rate cuts — or even hints that they are coming — can help calm markets and keep credit flowing. If it seems that the coronavirus is going to have longer-lasting effects on consumer and business spending, lower borrowing costs can offer some reprieve by stoking demand.
“I think it would send a huge signal if the Fed was willing to cut rates, even a quarter of a point, on an inter-meeting basis,” Narayana Kocherlakota, formerly president of the Federal Reserve Bank of Minneapolis, said Friday. And coordinating statements with other global central banks could help, he said. “This is obviously a global shock, so it’s reasonable to think about a global response.”“I think it would send a huge signal if the Fed was willing to cut rates, even a quarter of a point, on an inter-meeting basis,” Narayana Kocherlakota, formerly president of the Federal Reserve Bank of Minneapolis, said Friday. And coordinating statements with other global central banks could help, he said. “This is obviously a global shock, so it’s reasonable to think about a global response.”
The United States’s central bank is in a better starting position than many of its peers. It managed to lift rates amid a stronger recovery, and borrowing costs are now set in a range of 1.5 to 1.75 percent. But it too has far less room to cut than before the Great Recession, when it slashed rates to near zero from above 5 percent.The United States’s central bank is in a better starting position than many of its peers. It managed to lift rates amid a stronger recovery, and borrowing costs are now set in a range of 1.5 to 1.75 percent. But it too has far less room to cut than before the Great Recession, when it slashed rates to near zero from above 5 percent.
Markets are betting that officials will make a full percentage point in rate cuts by the end of the year.Markets are betting that officials will make a full percentage point in rate cuts by the end of the year.
But in many places, monetary policy has less room to work.But in many places, monetary policy has less room to work.
China’s central bank has already lowered its key interest rate, and the government’s tight control means that it can pump a lot of money into the economy quickly. But Beijing has been doing just that ever since the global financial crisis, producing an ever-rising mountain of debt that could grow even taller as the authorities force banks to respond to the current difficulties.China’s central bank has already lowered its key interest rate, and the government’s tight control means that it can pump a lot of money into the economy quickly. But Beijing has been doing just that ever since the global financial crisis, producing an ever-rising mountain of debt that could grow even taller as the authorities force banks to respond to the current difficulties.
The Bank of Japan has few options left when it comes to juicing growth, though its governor, Haruhiko Kuroda, has said it stands ready to act as needed. Its already-negative interest rates mean it is more expensive for Japanese banks to stow money away than to lend it to businesses, but banks can have a hard time finding places to lend.The Bank of Japan has few options left when it comes to juicing growth, though its governor, Haruhiko Kuroda, has said it stands ready to act as needed. Its already-negative interest rates mean it is more expensive for Japanese banks to stow money away than to lend it to businesses, but banks can have a hard time finding places to lend.
And in South Korea, where rates are low but positive, the central bank surprised investors by leaving interest rates unchanged on Thursday even as the country struggles with the largest known coronavirus outbreak outside China.And in South Korea, where rates are low but positive, the central bank surprised investors by leaving interest rates unchanged on Thursday even as the country struggles with the largest known coronavirus outbreak outside China.
The European Central Bank could offer loans with negative interest rates to eurozone banks, on the condition that they loan the money to customers. But benchmark interest rates are already at historic lows and Christine Lagarde, who became president of the European Central Bank in November, has not encouraged hopes for a swift jolt of stimulus.The European Central Bank could offer loans with negative interest rates to eurozone banks, on the condition that they loan the money to customers. But benchmark interest rates are already at historic lows and Christine Lagarde, who became president of the European Central Bank in November, has not encouraged hopes for a swift jolt of stimulus.
Because no one knows how bad the epidemic will get, it is unclear how much stimulus will be needed — which is part of the reason this is such uncertain territory for the Fed and other central banks. If contained quickly, the coronavirus could deal a short-term blow to growth and economies could quickly snap back. But the chances of a painful slump are rising as the virus spreads.Because no one knows how bad the epidemic will get, it is unclear how much stimulus will be needed — which is part of the reason this is such uncertain territory for the Fed and other central banks. If contained quickly, the coronavirus could deal a short-term blow to growth and economies could quickly snap back. But the chances of a painful slump are rising as the virus spreads.
Forecasters have cut economic growth estimates in the United States and globally, though the projections vary widely as economists struggle to predict the virus’s trajectory and the resulting damage. Bank of America researchers reduced their forecast for 2020 growth in the United States by 0.1 percent on Friday, to 1.6 percent overall.Forecasters have cut economic growth estimates in the United States and globally, though the projections vary widely as economists struggle to predict the virus’s trajectory and the resulting damage. Bank of America researchers reduced their forecast for 2020 growth in the United States by 0.1 percent on Friday, to 1.6 percent overall.
Moody’s Analytics said this week that the odds of a recession had risen to 4 in 10. Capital Economics pegged it much lower, at 1 in 10.Moody’s Analytics said this week that the odds of a recession had risen to 4 in 10. Capital Economics pegged it much lower, at 1 in 10.
There is a risk that conditions could devolve if the virus spreads more quickly than expected. There is a growing consensus among economists that Europe is already headed into a recession and that weakness is likely to spread, hampering growth in the United States as well.There is a risk that conditions could devolve if the virus spreads more quickly than expected. There is a growing consensus among economists that Europe is already headed into a recession and that weakness is likely to spread, hampering growth in the United States as well.
Updated June 1, 2020
Exercise researchers and physicians have some blunt advice for those of us aiming to return to regular exercise now: Start slowly and then rev up your workouts, also slowly. American adults tended to be about 12 percent less active after the stay-at-home mandates began in March than they were in January. But there are steps you can take to ease your way back into regular exercise safely. First, “start at no more than 50 percent of the exercise you were doing before Covid,” says Dr. Monica Rho, the chief of musculoskeletal medicine at the Shirley Ryan AbilityLab in Chicago. Thread in some preparatory squats, too, she advises. “When you haven’t been exercising, you lose muscle mass.” Expect some muscle twinges after these preliminary, post-lockdown sessions, especially a day or two later. But sudden or increasing pain during exercise is a clarion call to stop and return home.
States are reopening bit by bit. This means that more public spaces are available for use and more and more businesses are being allowed to open again. The federal government is largely leaving the decision up to states, and some state leaders are leaving the decision up to local authorities. Even if you aren’t being told to stay at home, it’s still a good idea to limit trips outside and your interaction with other people.
Touching contaminated objects and then infecting ourselves with the germs is not typically how the virus spreads. But it can happen. A number of studies of flu, rhinovirus, coronavirus and other microbes have shown that respiratory illnesses, including the new coronavirus, can spread by touching contaminated surfaces, particularly in places like day care centers, offices and hospitals. But a long chain of events has to happen for the disease to spread that way. The best way to protect yourself from coronavirus — whether it’s surface transmission or close human contact — is still social distancing, washing your hands, not touching your face and wearing masks.
Common symptoms include fever, a dry cough, fatigue and difficulty breathing or shortness of breath. Some of these symptoms overlap with those of the flu, making detection difficult, but runny noses and stuffy sinuses are less common. The C.D.C. has also added chills, muscle pain, sore throat, headache and a new loss of the sense of taste or smell as symptoms to look out for. Most people fall ill five to seven days after exposure, but symptoms may appear in as few as two days or as many as 14 days.
If air travel is unavoidable, there are some steps you can take to protect yourself. Most important: Wash your hands often, and stop touching your face. If possible, choose a window seat. A study from Emory University found that during flu season, the safest place to sit on a plane is by a window, as people sitting in window seats had less contact with potentially sick people. Disinfect hard surfaces. When you get to your seat and your hands are clean, use disinfecting wipes to clean the hard surfaces at your seat like the head and arm rest, the seatbelt buckle, the remote, screen, seat back pocket and the tray table. If the seat is hard and nonporous or leather or pleather, you can wipe that down, too. (Using wipes on upholstered seats could lead to a wet seat and spreading of germs rather than killing them.)
More than 40 million people — the equivalent of 1 in 4 U.S. workers — have filed for unemployment benefits since the pandemic took hold. One in five who were working in February reported losing a job or being furloughed in March or the beginning of April, data from a Federal Reserve survey released on May 14 showed, and that pain was highly concentrated among low earners. Fully 39 percent of former workers living in a household earning $40,000 or less lost work, compared with 13 percent in those making more than $100,000, a Fed official said.
Yes, but make sure you keep six feet of distance between you and people who don’t live in your home. Even if you just hang out in a park, rather than go for a jog or a walk, getting some fresh air, and hopefully sunshine, is a good idea.
Taking one’s temperature to look for signs of fever is not as easy as it sounds, as “normal” temperature numbers can vary, but generally, keep an eye out for a temperature of 100.5 degrees Fahrenheit or higher. If you don’t have a thermometer (they can be pricey these days), there are other ways to figure out if you have a fever, or are at risk of Covid-19 complications.
The C.D.C. has recommended that all Americans wear cloth masks if they go out in public. This is a shift in federal guidance reflecting new concerns that the coronavirus is being spread by infected people who have no symptoms. Until now, the C.D.C., like the W.H.O., has advised that ordinary people don’t need to wear masks unless they are sick and coughing. Part of the reason was to preserve medical-grade masks for health care workers who desperately need them at a time when they are in continuously short supply. Masks don’t replace hand washing and social distancing.
If you’ve been exposed to the coronavirus or think you have, and have a fever or symptoms like a cough or difficulty breathing, call a doctor. They should give you advice on whether you should be tested, how to get tested, and how to seek medical treatment without potentially infecting or exposing others.
If you’re sick and you think you’ve been exposed to the new coronavirus, the C.D.C. recommends that you call your healthcare provider and explain your symptoms and fears. They will decide if you need to be tested. Keep in mind that there’s a chance — because of a lack of testing kits or because you’re asymptomatic, for instance — you won’t be able to get tested.
Charity Navigator, which evaluates charities using a numbers-based system, has a running list of nonprofits working in communities affected by the outbreak. You can give blood through the American Red Cross, and World Central Kitchen has stepped in to distribute meals in major cities.
Other vulnerabilities also exist. As in the 2008 crisis, financial risks threaten to aggravate any growth slump that materializes. Corporations owed $13.5 trillion to bond holders at the end of 2019, an all-time high. Half of the corporate bonds issued last year were rated just one notch above junk. If debt-laden companies fail to keep up with payments amid supply chain shutdowns and work closings, they could default, handing big losses to the investors backing the loans and rippling through the financial system in unexpected ways.Other vulnerabilities also exist. As in the 2008 crisis, financial risks threaten to aggravate any growth slump that materializes. Corporations owed $13.5 trillion to bond holders at the end of 2019, an all-time high. Half of the corporate bonds issued last year were rated just one notch above junk. If debt-laden companies fail to keep up with payments amid supply chain shutdowns and work closings, they could default, handing big losses to the investors backing the loans and rippling through the financial system in unexpected ways.
Markets are already wary about such a possibility. Investors are pulling money from funds that track loans to highly indebted companies and those with low credit ratings — running away from the type of debt that usually fails first when companies run into trouble.Markets are already wary about such a possibility. Investors are pulling money from funds that track loans to highly indebted companies and those with low credit ratings — running away from the type of debt that usually fails first when companies run into trouble.
“There are plenty of risks in terms of financial stability, and also a lot of geopolitical risks,” said Lorenzo Codogno, former chief economist for the Italian Treasury, who is now an independent consultant in London. “The situation is intrinsically fragile. In my view, the coronavirus could be the tipping point.”“There are plenty of risks in terms of financial stability, and also a lot of geopolitical risks,” said Lorenzo Codogno, former chief economist for the Italian Treasury, who is now an independent consultant in London. “The situation is intrinsically fragile. In my view, the coronavirus could be the tipping point.”
The fallout could present the first significant test of the defenses central bankers and regulatory authorities erected around the financial system after the 2008 meltdown plunged their economies into the abyss.The fallout could present the first significant test of the defenses central bankers and regulatory authorities erected around the financial system after the 2008 meltdown plunged their economies into the abyss.
It should help that the system is stronger now than it was more than decade ago. Bank capital levels are much higher, meaning big banks that nearly toppled in 2008 can withstand major losses. And so far, there are no signs of the sort of funding pressures and cash crunches that defined the financial crisis.It should help that the system is stronger now than it was more than decade ago. Bank capital levels are much higher, meaning big banks that nearly toppled in 2008 can withstand major losses. And so far, there are no signs of the sort of funding pressures and cash crunches that defined the financial crisis.
The Fed has other tools at its disposal should the financial system run into trouble: It can keep dollars flowing internationally and provide loans to banks through the so-called discount window, which can help to relieve any short-term shortage of funds among commercial banks.The Fed has other tools at its disposal should the financial system run into trouble: It can keep dollars flowing internationally and provide loans to banks through the so-called discount window, which can help to relieve any short-term shortage of funds among commercial banks.
Because monetary officials in Europe and parts of Asia are short on tools to combat a potential crisis, the pressure is on governments to act instead. Central banks have urged their elected counterparts for years to move more decisively to prop up growth.Because monetary officials in Europe and parts of Asia are short on tools to combat a potential crisis, the pressure is on governments to act instead. Central banks have urged their elected counterparts for years to move more decisively to prop up growth.
China has announced measures including tax cuts for small firms. Italy has already promised to let businesses delay paying their taxes until sales get back to normal, a measure it has used in the past in regions hit by earthquakes. In Germany, politicians have been hinting they may loosen limits on debt spending.China has announced measures including tax cuts for small firms. Italy has already promised to let businesses delay paying their taxes until sales get back to normal, a measure it has used in the past in regions hit by earthquakes. In Germany, politicians have been hinting they may loosen limits on debt spending.
The Trump administration has been discussing another round of tax cuts, but Mr. Trump said the plan would not be rolled out until later this year. Some Democratic lawmakers have asked the administration to think about interest-free loans for small business and other targeted spending, but so far that has not gained any traction.The Trump administration has been discussing another round of tax cuts, but Mr. Trump said the plan would not be rolled out until later this year. Some Democratic lawmakers have asked the administration to think about interest-free loans for small business and other targeted spending, but so far that has not gained any traction.
Whether fiscal policy can be more effective depends on how the economy reacts. For now, the best thing policymakers can do is stem the flow of infection with an effective public health response, economists say. But if that fails, fiscal policy could be more adept at targeting assistance to the places that need it — helping vulnerable businesses by issuing low-cost loans or other types of financing or directing funds to communities struggling in the wake of the virus.Whether fiscal policy can be more effective depends on how the economy reacts. For now, the best thing policymakers can do is stem the flow of infection with an effective public health response, economists say. But if that fails, fiscal policy could be more adept at targeting assistance to the places that need it — helping vulnerable businesses by issuing low-cost loans or other types of financing or directing funds to communities struggling in the wake of the virus.
Mr. Trump said on Saturday that there were no plans for an immediate fiscal response.Mr. Trump said on Saturday that there were no plans for an immediate fiscal response.
“I think the big thing we’re looking for is the Fed to do its job,” he said.“I think the big thing we’re looking for is the Fed to do its job,” he said.
Keith Bradsher, Carlos Tejada and Jim Tankersley contributed reporting.Keith Bradsher, Carlos Tejada and Jim Tankersley contributed reporting.