COVID-19

What if the economy needs more than the Fed can give it?

Sabri Ben-Achour Mar 3, 2020
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Federal Reserve Chair Jerome Powell announced an interest rate cut of half a percentage point Tuesday. Scott Olson/Getty Images
COVID-19

What if the economy needs more than the Fed can give it?

Sabri Ben-Achour Mar 3, 2020
Federal Reserve Chair Jerome Powell announced an interest rate cut of half a percentage point Tuesday. Scott Olson/Getty Images
HTML EMBED:
COPY

There’s a lot the Federal Reserve can do to keep credit moving in the economy and help businesses that might need loans to weather the coronavirus storm. Tuesday, it cut interest rates by half a percentage point.

If it gets people to refinance homes, it could even get people to spend. But interest rates are already low, and there’s a limit to the Fed’s power. If COVID-19, the disease caused by the new coronavirus, causes a substantial slowdown or recession, the government may need to spend its way out of the economic consequences.

Ultimately, a virus is not a financial problem. Steve Blitz, chief U.S. economist for TS Lombard, said if the virus creates a recession or economic slowdown — and let us stress if — it would be the first time since the 1970s oil crisis that such a slowdown had a nonfinancial cause.

“Interest rates in and of themselves are not the reason for the slowdown, therefore, interest rates in and of itself are not the solution,” Blitz said.

Mark Zandi, chief economist at Moody’s Analytics, said fiscal stimulus — government spending — is the answer. This is, he said, what got us out of the Great Recession as quickly as we did.

“The most straightforward, obvious thing would be a payroll tax holiday,” Zandi said. “We all pay payroll taxes. We could not pay them for awhile, [and] that would be a cash infusion, particularly to low-middle income households, and they would spend that very quickly.”

If the COVID-19 virus were to cause layoffs, food stamps and unemployment insurance would keep people spending and driving the economy. Jay Bryson, acting chief economist with Wells Fargo Securities, said the government might have to get creative.

“Maybe we spend a boatload of money on opening up hospitals,” Bryson said. “If you have to quarantine a bunch of people, you could subsidize companies for child care, say, if suddenly we start closing bunches of schools for a month or two.”

Any response like that is going to depend on the impact of the coronavirus disease — does it pass after a month or two, or does it drag down economic growth substantially?

“In reality, politically you’re not going to get any fiscal response until you see unemployment rise,” Blitz said.

Basically, a fiscal response to COVID-19 is going to take a while, especially in a polarized political environment. It would also cost money, which would have to be borrowed. Despite a healthy economy, the government’s deficit has ballooned to nearly a trillion dollars over the past few years on the back of tax cuts and increased spending.

COVID-19 Economy FAQs

Millions of Americans are unemployed, but businesses say they are having trouble hiring. Why?

This economic crisis is unusual compared to traditional recessions, according to Daniel Zhao, senior economist with Glassdoor. “Many workers are still sitting out of the labor force because of health concerns or child care needs, and that makes it tough to find workers regardless of what you’re doing with wages or benefits,” Zhao said. “An extra dollar an hour isn’t going to make a cashier with preexisting conditions feel that it’s safe to return to work.” This can be seen in the restaurant industry: Some workers have quit or are reluctant to apply because of COVID-19 concerns, low pay, meager benefits and the stress that comes with a fast-paced, demanding job. Restaurants have been willing to offer signing bonuses and temporary wage increases. One McDonald’s is even paying people $50 just to interview.

Could waiving patents increase the global supply of COVID-19 vaccines?

India and South Africa have introduced a proposal to temporarily suspend patents on COVID-19 vaccines. Backers of the plan say it would increase the supply of vaccines around the world by allowing more countries to produce them. Skeptics say it’s not that simple. There’s now enough supply in the U.S that any adult who wants a shot should be able to get one soon. That reality is years away for most other countries. More than 100 countries have backed the proposal to temporarily waive COVID-19 vaccine patents. The U.S isn’t one of them, but the White House has said it’s considering the idea.

Can businesses deny you entry if you don’t have a vaccine passport?

As more Americans get vaccinated against COVID-19 and the economy continues reopening, some businesses are requiring proof of vaccination to enter their premises. The concept of a vaccine passport has raised ethical questions about data privacy and potential discrimination against the unvaccinated. However, legal experts say businesses have the right to deny entrance to those who can’t show proof.

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