Central Banks Not Equipped to Handle Economic Result
The US economy is facing a possible threat. This followed the US Federal Reserve’s announcement to lower interest rates in an effort to combat the ongoing economic crisis caused by the globally spreading coronavirus.
However, experts warn that the global economy will not benefit much from the existing rigid monetary policy. Currently, some central banks are already in negative low-interest territory. Yet economists and investors maintain that the world economy might be looking at the possibility of a global recession.
The situation, according to the Chairman of the US Federal Reserve Jerome Powell, remains a fluid one, marking it the first and the biggest cut in the US since the last financial crisis in 2008.
Central Banks Are Responding but That Won’t Cut It for the Global Economy
The coronavirus already infected close to 100,000 people around the world. The most affected countries are China, Japan, South Korea, Italy, and Iran. A 100 cases of infected people in the US have been reported in various metropolitan areas with a recent fatality bringing the total number of deaths to nine.
At the epicenter of the outbreak in China, the government already promised to offer handouts to permanent residents. This will lower tax rates for individuals and SMEs in Hong Kong.
Other preventive measures in China include closing down social event locations and restricting flights. Additionally, quarantining the sick and shutting down factories, are hurting its economy greatly. However, they helped slow down the rate of coronavirus infections.
Saying that the measures are rather draconian. The Director of the Center for Disease Control and Prevention, Anthony Fauci added that China took social distancing to its farthest extreme.
Still, in Asia, economic news report that Bank of Japan has vowed to make efforts to ensure stability of its financial markets, according to Haruhiko Kuroda who added that the central bank, “will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases.”
In Europe, Italy has the highest recorded outbreak cases. Citi Private Bank’s EMEA Investment Strategist Jeffery Sacks said that the European Central Bank cutting rates is still an inadequate response to fight the coronavirus.
If measures by US Federal Reserve Fail, it will Adversely Affect the Global Economy
Moody Analytics stated in a recent report that currently, the chances of COVID-19 turning into a global epidemic doubled. It rose from 20% to 40%.
According to the chief economist at Moody’s Analytics Mark Zandi, the response that the US government, in particular, will have if the coronavirus becomes a global pandemic will determine how much the global economy will be affected.
Speaking to CNBC’s Squawk BOX Asia, Zandi said, “If this turns into a pandemic that engulfs the United States. It’s pretty difficult to envision the US economy getting through without a full-blown recession. That means the entire global economy will be in recession.”
The Federal Reserve Admits To Not Having All the Answers
While the low-interest rates enable qualified residents and business owners to borrow cheaply, there is little that the move can do to prevent the fear and spread of infections. There are no guidelines as to how companies should deal with supply, demand, and deliveries or with sick absentee workers.
Powell added, “We do recognize that a rate cut cannot reduce the rate of infection. It won’t fix a broken supply chain, we get that, we don’t think we have all the answers.”
As the number of infected people continues to grow globally, many investors maintain that the Federal Reserve did the right thing by cutting the rates. Moreover, they are expected to go lower in the coming months.
The situation remains speculative. More investors wait to see how the Fed and other Central Banks, will continue to respond to the coronavirus shockwave.
Asia’s Head of Investment Strategy at J.P Morgan Private Bank Alex Wolf, stated, “The fact is we’re coming into this crisis with far less ammunition globally. It is not just Europe or Japan even in China. They have much less ammunition than the last time they had to launch a stimulus package.”
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