The Federal Reserve is going all out to combat the financial effects of the new coronavirus. It unleashed rate cuts, easier credit conditions and cheaper access to dollars on March 15, and argues it has more up its sleeve if needed. But it’s not enough, without fiscal stimulus or adequate public health remedies. There, it’s up to politicians to step up.
An emergency rate cut of half a percentage point earlier this month failed to calm markets. Companies tapped credit lines while Treasury trading experienced worrying liquidity disruptions. Other central banks in Europe had moved faster and more decisively. So the Fed’s new decisions to cut rates to near zero, purchase at least $700 billion in Treasury securities and mortgage-backed securities and enhance US dollar swap lines with other central banks are all helpful.
The central bank is also doing what it can for the micro-economy, though there it has less power. Banks can borrow for up to 90 days from the so-called discount window, and are being told they can tap capital and liquidity buffers built up since the last crisis. That helps them to support their customers. Still, Fed Chairman Jay Powell acknowledged on March 15 that he doesn’t have the tools to reach households or small businesses. Initial investor reaction reflects the central bank’s limits: S&P 500 Index futures fell nearly 5 per cent.
That’s where other levers of the government come into play. Late Friday, the US House of Representatives passed a package to provide some paid sick leave, free testing for Covid-19 and greater unemployment insurance benefits. Still, it’s unclear when the Senate will pass the bill. One of the biggest problems is that the administration of President Donald Trump has acted too slowly, failing to make testing freely available and alienating other governments with travel bans. The Fed has at least worked with its global counterparts.
The Fed can do more, though not easily. For example, in order to buy other assets that aren’t government-backed it would need approval from Congress, which removed some of its 2008 financial crisis powers. Even if that’s authorised, at some point the Fed will run low on ammunition. The economy will depend on other policycmakers bringing out their big guns. Right now, Powell’s response shows that the politicians are still firing peashooters.