Fed rate cut seen as a certainty but will it go to zero?

WASHINGTON • The US Federal Reserve will have one job this week: convince the world it is doing everything it can to blunt the impact of the coronavirus on the economy even if its tools are not the best ones for the job.

In the eight weeks since Fed chairman Jerome Powell presided over the central bank's last scheduled policy meeting, the outbreak has transformed the global economy, forcing the Fed to make an emergency half-point cut to its benchmark lending rate and inject US$1.5 trillion (S$2.1 trillion) into financial markets last week.

At its two-day meeting starting tomorrow, analysts say the question is not whether the Fed will cut again - that is seen as a certainty - but how low it will go.

"Do they go to zero immediately or wait till April? That's a hard call," Grant Thornton chief economist Diane Swonk told Agence France-Presse. She cautioned that "cutting rates alone literally cannot cure what ails us", but "it can help on the other side, it can help blunt the blow".

The pandemic has already hammered Wall Street, putting it back into a "bear market" for the first time in 11 years and wiping out over US$16 trillion in equity worldwide.

The Fed twice boosted cash injections into financial markets and announced a massive and unprecedented US$1.5 trillion in extra funding last week alone. It also broadened purchases of US Treasury debt, moves likened to the "quantitative easing" strategy used during the 2008 global financial crisis.

But analysts say those moves are not enough by themselves to inoculate the economy. That will require the help of politicians wielding the power of the purse to aid consumers and businesses, and public health authorities fighting the virus.

"If this were a movie, the Fed would be playing the role of a supporting actor," said former Fed adviser David Wilcox, who is now with the Peterson Institute for International Economics in Washington.

On March 3, the central bank implemented the first emergency cut since 2008 as the outbreak worsened, bringing the benchmark down to 1-1.25 per cent.

The CME Group puts the odds of another cut at the meeting concluding on Wednesday as a certainty, with almost all respondents saying the central bank will drop the target rate to 0-0.25 per cent. A cut to zero would bring monetary policy back to where it was in the global financial crisis.

While some economists worry about the Fed using all of its firepower so soon, others argue that the lessons of 2008 are that waiting will only prolong the pain.

But this decline is different, the result of a full stop in factory production and consumer spending as the virus transforms daily life, and experts say only a massive spending programme can cushion the blow to businesses and workers.

AGENCE FRANCE-PRESSE