US Federal Reserve Unveils Two Shields, but Situation Differs from 2008

Uncertain Effects of Virus Response Monetary Policy
Trump "Welcomes"

Jerome Powell, Fed Chair [Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] It is unprecedented for the U.S. central bank, the Federal Reserve (Fed), to simultaneously deploy two shields: zero (0) interest rates and quantitative easing (QE). Even during the 2008 global financial crisis, considered the worst crisis since the Great Depression in the U.S., the Fed first cut interest rates and then sequentially used the quantitative easing card.

The U.S. authorities judge that the economic deterioration caused by the novel coronavirus infection (COVID-19) is so severe that it surpasses the financial crisis.

In particular, there is an analysis that the current difficulty involves a qualitative difference in uncertainty because it targets an unknown adversary, the virus, rather than the economy. The Wall Street Journal (WSJ) even evaluated in a column immediately after the Fed’s rate cut, "If you are looking at an economic crisis, it is right now."

Until last year, the Fed weighed the possibility of no rate cuts this year. After cutting rates three times last year, it decided to hold rates steady in December and stated that it would not lower rates further. However, the situation completely reversed in just three months. The fact that the unanimous decision to cut rates was not reached at the emergency meeting this time indicates how difficult this decision was. On March 3, the Fed committee unanimously agreed on a 0.5 percentage point rate cut.

Goldman Sachs downgraded the U.S. economic growth rate for this year in a report last weekend. It forecasted 0% growth in the first quarter and a decline of -0.5% in the second quarter. The previous forecast was 0.7% for the first quarter and 0% for the second quarter. This means that beyond the industries directly hit by COVID-19 such as airlines and travel, the entire U.S. economy, including retail and energy sectors, is expected to contract as economic activities within the U.S. are gradually halted.

Accordingly, although the Fed pulled out the 'big cut' interest rate reduction card, the possibility of additional measures cannot be ruled out. For now, Fed Chair Jerome Powell clearly stated in a press conference call after the rate cut that "negative policy rates do not seem to be an appropriate policy response in the U.S." and that they will not implement them.

However, there are expectations that the Fed will take further actions to support the economy. Bloomberg News mentioned, "The situation is urgent," and "various measures beyond an economic shock will be introduced."

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