The Federal Reserve has nearly unloaded its available arsenal of weapons to avert a recession as the coronavirus pandemic unleashes chaos on the global economy.
The Fed slashed its baseline interest rate range to 0 to 0.25 percent Sunday and announced it would purchase at least $700 billion in bonds to stabilize financial markets and keep credit flowing to households and businesses.
The central bank’s emergency action could help the financial sector weather the unprecedented shutdown of crucial industries and support the economy’s rebound when the pandemic subsides.
Even so, the escalating closures of restaurants, bars, schools and retail stores across the country may cause a surge in unemployment and a nosedive in consumer spending that the Fed may have little power to fight.
“Families, businesses, schools, organizations and governments at all levels are taking steps to protect people’s health. These measures, which are essential for containing the outbreak, will nonetheless, understandably, take a toll on economic activity in the near term,” Fed Chairman Jerome Powell told reporters Sunday.
The coronavirus pandemic has unleashed a level of panic in financial markets not seen since the height of the 2007-08 crisis.
As the novel coronavirus spreads throughout the U.S., public health officials, governors and mayors have urged Americans to take drastic measures that will help slow its progress but will also take a heavy toll on the U.S. economy.
U.S. stocks have crashed from record highs, while a scramble among banks to free up credit roiled the bond market. On Monday, the Dow Jones Industrial Average plunged almost 3,000 points, marking the second-worst day in its history.
President Trump, who has been criticized for downplaying the seriousness of the pandemic, acknowledged Monday that the U.S. economy could be sliding into a recession.
“It may be,” Trump said during a Monday press conference, adding he was focused more on the virus than the economy.
“I don’t, number one, determine recession,” Trump continued “I just say this: We have an invisible enemy. We have a problem that, a month ago, nobody ever thought about.”
Eager to avoid its missteps ahead of the 2007-08 recession, the Fed has taken swift action to blunt the pandemic’s economic damage. The bank on Sunday zeroed out its baseline interest rate range, which financial firms use to set rates on home and auto loans, credit cards, and other consumer financial products.
The Fed also announced it would buy at least $500 billion in Treasury bonds and $200 billion in mortgage-backed securities to stimulate the economy and ensure banks have enough capital to anchor the financial system.
Experts say that those measures — among others the Fed rolled out Sunday to calm financial markets — are nearly all of the ammunition the central bank has to support the economy and financial sector through an unprecedented crisis.
While the Fed also has the authority to offer direct loans to ailing industries and purchase corporate debt, it’s unclear when and if the bank may use it.
“We have the tools that we have,” Powell said Sunday. “I think we use them quite aggressively for the benefit of the public.”
But Powell warned that the Fed’s push to support consumer demand and bond market liquidity could struggle to reach those facing immediate and dire financial troubles.
“This is a multifaceted problem, and it requires answers from different parts of the government,” Powell said, adding that it was “critical” for lawmakers and the president to launch a fiscal stimulus plan to help workers and businesses in ways that lower interest rates cannot.
The Fed’s emergency intervention did little to soothe Wall Street. Stocks continued to crash in futures trading Sunday night and again Monday morning, with the Dow Jones Industrial Average plunging nearly 3,000 points, or 12. 9 percent, suffering its second-worst loss by percentage in history.
Economists and lawmakers across the ideological spectrum have called for an ambitious rescue package that includes direct grants to laid-off workers and small-business owners who may miss rent payments or be forced to let go employees.
“The Fed did its job. Now it is up to members of Congress to do theirs,” wrote Diane Swonk, chief economist at Grant Thornton, in a Sunday research note.
“We will need bailouts and cash in people’s hands to cover basic needs of food and shelter. The cost-benefit analysis on this is simple. If Congress fails, the recession will be deeper and the carnage it triggers will be longer. Pandemics have end dates; financial crises do not,” he added.
Congress already passed $8.3 billion in funding to fight the coronavirus earlier this month. The House also passed a second bill over the weekend to provide paid leave for some employees and strengthen unemployment insurance, and it now heads to the Senate.
Some lawmakers want a third economic package. Senate Minority Leader Charles Schumer (D-N.Y.) is set to unveil a plan with at least $750 billion to fight the coronavirus and its economic impact.
Treasury Secretary Steven Mnuchin is expected to propose up to $800 billion in fiscal stimulus in a meeting with Senate Republicans on Tuesday, according to Politico, some of whom have their own ideas circulating.
Sen. Mitt Romney (R-Utah) proposed sending every American adult a $1,000 grant, akin to checks issued during the 2001 and 2008 recessions. And Sen. Tom Cotton (R-Ark.), a staunch fiscal conservative, is rallying support for expanded unemployment and food aid benefits among Republican colleagues.
Trump and some economists have expressed optimism that a pandemic-driven recession would be brief. He predicted Monday that “once this goes away, once it goes through and we’re done with it, I think you’re going to see a tremendous surge.”
Ian Shepherdson, founder and chief economist at research firm Pantheon Economics, said that while U.S. gross domestic product may dip by 1 percent annualized during the first quarter of 2020 and by 10 percent in the second, the economy may rebound enough to close out the year falling by just 1 percent.
“The Fed’s emergency actions Sunday appear to have scared investors into thinking that the Fed knows something they don’t. We think the latter is unlikely, but we do think that markets have been slow to grasp the scale of the problem,” Shepherdson wrote in a Monday research note.
“Congress needs now to step up, in real size,” he added.