Fed Ready to Cut Rates Despite Doubt They Can Fix Virus Fallout

The Federal Reserve has sounded its cavalry charge ala Apocalypse Now.

(Bloomberg) — The Federal Reserve is now prepared to reduce interest rates this month even though it recognizes monetary policy cannot completely shelter a U.S. economy increasingly threatened by the coronavirus.

Fed Chairman Jerome Powell opened the door to a rate-cut at the Fed’s March 17-18 meeting by issuing a rare statement Friday pledging to “act as appropriate” to support the economy.

He was pushed into making that assurance by spectacular losses in U.S. stocks as investors turned fearful that the spreading virus would significantly damage the American and global economies. Traders and a string of Wall Street banks now expect the Fed to lower rates in the coming months, with some seeing the possibility of an emergency cut before the central bank’s March meeting.

In doubt though is how much effect rate cuts will actually have amid a health emergency that threatens to reduce both supply and demand in the economy. No matter what the Fed does, factories can’t churn out goods if they can’t get needed materials from abroad. Consumers are also unlikely to spend if scared to leave their homes. Note: Ever hear of Amazon?

But cheaper credit can still help drive an economic rebound and restore confidence once the virus is controlled. And while it doesn’t like to be depicted as racing to the rescue of markets, the Fed can limit the damage from tighter financial conditions on the economy.

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Former chief economist at the International Monetary Fund Olivier Blanchard questioned though how much good a Fed rate cut would do in the face of what he called “an unusual supply shock,” where factories are forced to curtail production because they can’t get parts from abroad.“Decreasing the policy rate by 25 basis points in that context doesn’t feel quite useful,” Blanchard said.

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The Fed rate cut is already appearing in the Fed Funds Futures data.

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Fed to the rescue? If Powell starts humming “Ride of the Valkyries,” hide!

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