On Monday morning, the economic threat from the coronavirus got real for U.S. policymakers.
In a surprise announcement, the Federal Reserve said it would immediately cut its interest rate target by half a percentage point, bringing the new target to a range of 1-to-1.25 percent.
Normally, the central bank announces its interest rate changes at its regularly scheduled meetings, the next of which happens March 17 and 18. And when the Fed has made cuts in recent years, it's limited itself to one-fourth of a percentage point reductions at a time. This will be the first time the Fed has cut interest rates this much in one go, or done so outside its normal schedule, since the financial crisis of 2008. It was also a unanimous decision among the voting Fed officials.
"We saw a risk to the outlook of the economy and we chose to act," Fed Chair Jerome Powell told reporters, in a press conference attempting to project measure and calm, even as the unusual nature of the decision underscored the potential seriousness of the situation.
The good news is that the Fed's move remains a preemptive measure to an economic threat that may materialize, rather than an after-the-fact response. The COVID-19 coronavirus has infected around 90,000 people worldwide — mostly in China, but with outbreaks rapidly expanding in Italy, Iran, Japan, South Korea, and other countries, leading to widespread shutdowns of social and economic activity in those places. Thus far, the United States has remained relatively unaffected, with our biggest problem being disrupted supply chains — specific companies and sectors here unable to get parts and inputs from abroad — and export-dependent industries facing a slowdown in global demand. But with domestic consumer spending making up 70 percent of our economic output, America has an enormous cushion to fall back on. The Fed's move is insurance, designed to make it even less likely that things go south.
In terms of fiscal policy responses from Congress, nothing concrete has happened yet. But discussions have definitely sped up.
On Monday, Massachusetts Senator Elizabeth Warren — one of the contenders for the Democrats' presidential nomination — proposed a $400 billion spending package to shore up the economy against the coronavirus. It includes emergency paid sick leave for people who contract the virus, as well as their close relatives; boosts to unemployment insurance; federal aid to shore up state and local budgets; emergency aid to hospitals and local providers to cover the potential costs of treating people with COVID-19; public investments to build out our response to the virus; and more. President Trump, meanwhile, took to Twitter to call for a one-year reduction in the payroll tax, and his administration is reportedly considering its own plan to reimburse hospitals for the costs of caring for COVID-19 patients, through established emergency measures designed to respond to natural disasters.
"I think people should be preparing a fiscal expansion," Jason Furman, a former chief economic advisor to President Obama, told The New York Times. "It may very well be needed." Though he also emphasized that even another "two or three weeks" could provide a lot more specific information about where aid would be most useful.
Admittedly, there are serious limits to what economic policy can do here. No form of stimulus can get people back to their jobs or restart supply chains if quarantines force workers to stay home. But easier monetary policy can make credit cheaper for businesses, as can the kind of emergency loans Warren is proposing, and that can temporarily plug holes in businesses' finances until supply chains restart, workers return, and people start spending again. "We don't think we have all the answers, but we do believe our action will provide meaningful support to the economy," Powell explained.
Meanwhile, a wide dispersion of cash back into working people's paychecks, such as Trump's proposed payroll tax cut, would boost demand across the domestic economy and provide at least something of an offset for companies losing demand abroad. (Unlike Trump's 2017 tax cuts, which focused their benefits on the wealthy, and thus did little-to-nothing for demand.) To give Trump his due, progressive economists and think tanks have echoed the idea of a payroll tax reduction, as well as federal aid to cover hospital expenses.
Even more important will be the measures to take if major outbreaks of the coronavirus do occur within America's borders, and cities and towns have to be quarantined. People forced to stay home rather than go to work will still need to buy basic necessities when they can, either online or when they can manage a trip to the store. But since they're not working, their employers may be unwilling or financially unable to continue sending paychecks; or they may have been laid off entirely as revenues contract. That's where direct cash aid like Warren is proposing comes in, such as boosting unemployment benefits and paid leave. (Or we could go even further, and give people checks outside of any pre-established program — effectively a temporary basic income.)
Once again, no amount of demand will restart a business or supply chain shut down due to infection; but it can provide extra help to the still-functioning parts of the economy, and limit the degree to which quarantines can turn into broader humanitarian disasters. Indeed, the fact that America's existing paid leave and welfare state systems are so skimpy — and the fact that it has no function universal health coverage system — means millions of people who should be staying home when they fall ill are forced to choose between their health (not to mention their neighbors' health) and their financial well-being.
Other important forms of help include aid to state budgets (also in Warren's proposal, as mentioned): States already provide a lot of the funding to programs like Medicaid and unemployment insurance, and they can't weather a fall in tax revenues with borrowing the same way the federal government can. Then there's all the public investment in health services and screening and such needed to respond to the virus directly, as opposed to cushioning the economy as a whole.
At any rate, the Fed interest rate cut means big policy responses to the potential economic consequences of the coronavirus have left the realm of theory. And this shift is international: Other central banks have already cut their rates, and the seven biggest economies in the world just released a joint statement reaffirming their commitment to "use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks" in the face of the COVID-19 outbreaks.
There is always the worry that big preemptive moves now could spark a panic in financial markets. The yield on 10-year Treasuries actually just dropped below one percent for the first time ever, signaling a flight to safety among investors. But ultimately we have to remember that the financial markets are not the real economy. Shoring up that real economy now is probably the best way to lower the chances of a future situation that really will be cause for panic.
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