Limitations of Interest Rate Cuts Alone Amid COVID-19... Fiscal Response Needed

[Asia Economy New York=Correspondent Baek Jong-min] The Federal Reserve's (Fed) surprise 0.5 percentage point rate cut, known as the market's 'lender of last resort,' failed to have an impact because there was a strong perception that it is not a fundamental solution to support the economic downturn caused by the novel coronavirus disease (COVID-19). Accordingly, views are emerging that ultimately fiscal policy must take action.

According to U.S. media including the Wall Street Journal (WSJ) on the 3rd (local time), experts have voiced concerns one after another about the Fed's rate cut decision. Columnist Greg Ip argued that rate cuts alone cannot respond to COVID-19. His diagnosis is that this is not an issue that central banks can solve amid the global low interest rate environment.

This is because the current concerns about economic slowdown are judged not to be due to uncertainty in forecasts but rather the fear of the spread of the epidemic, making conditions unsuitable for production and consumption. While lowering interest rates allows companies to raise funds at a lower cost, the situation does not change no matter how easy it is to raise funds when production and consumption are fundamentally impossible.

Neil Dutta, Chief Researcher at Renaissance Macro Research, stated, "The Fed's measures are incomplete and inappropriate for dealing with the public health crisis."

There are also views that fiscal expansion can be expected along with the rate cut. After an emergency phone call among the finance ministers and central bank governors of the Group of Seven (G7) on the same day, the 10-year U.S. Treasury yield entered an unprecedented territory of 0.91% during the session, clearly showing that the preference for safe assets has been maximized.

This can be interpreted to mean that governments around the world now have room to implement fiscal policies through bond issuance. Bank of America (BOA) judged that "Fed Chair Jerome Powell hopes for more direct solutions to the virus such as health fiscal policies to be implemented, and that policy coordination among other central banks will follow."

Despite the Fed's rate cut, U.S. President Donald Trump increased pressure by saying, "Rates should be lowered further." The U.S. has prepared an emergency budget for quarantine measures. According to the Associated Press (AP), the U.S. Congress plans to finalize discussions on a $7.5 billion (about 8.9 trillion won) emergency budget related to COVID-19. This amount is three times the $2.5 billion requested by President Donald Trump.

This content was produced with the assistance of AI translation services.