In a surprise move Sunday night, the Federal Reserve cut short-term interest rates by a full percentage point, several days ahead of its regularly scheduled March meeting. It also announced other measures to support financial markets, including buying $700 billion worth of Treasury bonds and mortgage-backed securities. And it cut the rate at which it lends to banks through the “discount window” to 0.25 percent, a cut of 1.5 points.
The last of these moves will get less public attention than the first two but may have been the most important. The Federal Reserve cannot directly improve how our government is handling the novel coronavirus, and as I’ve written before, it can’t do a lot right now to stimulate the economy through low interest rates. Where the Fed can do a lot is helping to ensure virus-driven problems in the real economy do not turn into problems in the banking system. The ultra-low rate at the discount window is intended to eliminate any hesitation banks might have about borrowing directly from the Fed; in normal conditions, market participants may look at a bank borrowing at the discount window and infer that it has problems and couldn’t find capital anywhere else. But when the rate is this low, borrowing at the discount window just looks like something you do because it is a good deal. With this move, the Fed is helping banks access the liquidity they need in times of extreme financial uncertainty, and therefore helping to ensure the availability of credit to businesses and individuals.
Despite the bold action by the Fed, stocks fell so sharply at the opening bell on Monday morning that trading was halted just seconds later. And the numbers didn’t look much better by the afternoon.
But I wouldn’t look at that drop and say the Fed’s action “didn’t work.” The Fed is doing what it needs to do to stave off a financial sector problem that hasn’t arisen yet. Stocks are down because of other problems the Fed can’t do much about: A virus outbreak that keeps getting scarier and more costly, and knock-on effects in the economy due to severe disruptions across many sectors, especially transportation, hospitality, and energy. The outbreak problem needs to be addressed by public-health professionals, and by members of the public heeding instructions about how to slow the spread of the virus. The sharp hits to certain sectors of the economy will require a robust fiscal response.
Not every problem in America sits in Jerome Powell’s portfolio, and now that the Fed has cut interest rates to zero, President Trump has one fewer scapegoat to blame for falling stock prices and the suddenly negative economic outlook. If he wants to get reelected, he should turn his attention exclusively to fighting the virus, so our economy — and our lives — can return to normal.
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