The Fed's response to the Coronavirus challenge
The Research Department of Intesa Sanpaolo expects a 50 basis point cut in US rates at the next Fed's meeting on March 17-18, bringing the target range for the fed funds rate to 0.5% - 0.75%. Subsequent interventions should bring rates to the zero limit by June 2020. In the meantime, the FOMC will prepare to act on other fronts, some now known (forward guidance, liquidity), others perhaps created by necessity (purchase of asset class securities other than Treasury and agencies, helicopter money).
According to the economists of Intesa Sanpaolo, the real uncertainty for the forecasts concerns not so much if there will be new measures, but how large they will be, what instruments they will concern and whether the Fed can wait for March 18 to act. In fact, on the one hand the Fed could intervene again before the regular meeting, making the forecasts made today obsolete. On the other hand, together with the rate decisions, the Fed will prepare measures to support liquidity and credit for businesses and families, while studying other extraordinary measures to be implemented in the event of a sharp deterioration in the scenario.
A widespread epidemic is an event in which the origin and transmission of the shock are outside the range of action of a central bank in "normal" situations. According to the Studies and Research Department, the first effect of a pandemic affects the supply side, with a reduction in the workforce and activities, which does not respond to the monetary stimulus. However, an epidemic transmits almost simultaneous effects also on the demand side, particularly affecting some sectors (transport, aggregation activities, discretionary spending). Furthermore, the rapid evolution of market corrections, indifferent to the rate cut implemented on March 3, implies that the "shock coronavirus" has activated a further transmission mechanism, ie the fall in the prices of financial assets. A large wealth effect and a possible transmission on the solvency of companies, adds to the blocks of supply and the drop in demand due to restriction (voluntary or caused by quarantine and other restrictive measures) of spending. The Fed is therefore in the front line to counter the inevitable slowdown in the US economy.
For now, the scenario envisaged by central Intesa Sanpaolo is a "V" trend, in a context of an epidemic limited to a single quarter, but the probability of a "U" (two negative quarters) is high, while an "L" (prolonged recession), cannot be excluded. The risks to the forecasts are oriented downwards and also depend on the speed of reaction of the fiscal policy. So far Congress has approved 8.3 billion measures aimed at prevention, therapy and research. By Thursday 12 March, the Chamber could present a new stimulus package, while the White House is pushing for a payroll tax cut, which is currently uncertain.
The document is available on the Banca IMI website (https://www.bancaimi.com/bancaimi/prodottieservizi/Ricerca-Macroeconomica-e-FICC-liberamente-avonibile/Studi-e-Ricerche.html ). It can be freely downloaded after having read and accepted the disclaimer on the page.
Last updated 12 March 2020 at 21:30:41
