A Resolute Central Bank

The American central bank is showing how seriously it is taking the coronavirus. However, whether the cut in interest rates will have the desired effect remains to be seen.

The Federal Reserve is showing how seriously it is taking the new coronavirus. In an unexpected move, it has cut the key interest rate by half a percentage point.

In doing so, the Fed is acknowledging that the epidemic is likely to harm the economy – a very powerful move. COVID-19, the new virus which first appeared in late 2019 in China, does in fact pose a challenge to the central elements of the global economy, namely international division of labor and global value chains.

Measures such as countries closing their borders, cancellation of flights and trade shows, and temporary factory closures may help stop the spread of the virus, but such measures come at a cost. For example, many downward revisions have now been made to growth forecasts.

The question remains open as to how effective monetary policy is in cushioning an economy against such shocks. Due to the suddenly improved credit conditions, factories closed by authorities may decide not to resume production.

Nevertheless, the virus has also very obviously affected demand. Innkeepers are worried about the decreased number of guests and the tourism industry is suffering in several regions in the United States. There is little hope that loosening monetary policy will help in the current situation, but who knows?