The Fed Speaks Loudly and Carries a Big Stick

The US Federal Reserve took dramatic action on Sunday, March 15, slashing interest rates and relaunching quantitative easing and other measures to battle the economic impacts of the coronavirus. Sonal Desai, CIO, Franklin Templeton Fixed Income, calls the Fed’s response “massive and well crafted.”

The US Federal Reserve (Fed) just announced (on Sunday, March 15) a massive and well-crafted policy response to the coronavirus shock.

A number of commentators have quickly criticized it or dismissed it, arguing that no amount of monetary stimulus can get people back to the malls or the restaurants when they are worried about contagion. Some argue that for the same reason, fiscal policy will also be toothless. I could not disagree more, for the following reasons:

    1. The measures announced today by the Fed—and the fiscal measures under consideration—will help businesses stay open and will reduce the number of layoffs. The people who, thanks to the Fed or the government, keep their job, or have more cash in their pockets thanks to fiscal policy, will still not go to the mall, but they will shop online, they will order food for home delivery, they will not cancel their mobile phones. All this has a positive effect on spending today and through the contagion period;
    2. Once contagion is contained and extreme social distancing stops, hopefully within 4-6 weeks, the economic recovery will be faster and stronger if more businesses have been able to stay open and more people have kept their jobs through the worst of the crisis;
    3. This will be a temporary shock. Monetary and fiscal policy do not need to get people back to the shopping mall or on a flight, they need to keep them employed and spending on other things while the crisis lasts, and ready to go back to the mall or the airport when it stops. Monetary and fiscal policy are not expected to boost production in the factory facing weaker demand, they are aimed at helping the factory stay open until demand recovers.