Coronavirus Fears Are Driving Interest Rates Down, a Bad Omen for the Economy

Coronavirus Fears Are Driving Interest Rates Down, a Bad Omen for the Economy


Look at it this way: One year ago, the short-term interest rate that the Fed uses to guide the economy was above 2.25 percent. Last summer and fall, as trade wars and a slowing global economy appeared to threaten the American economy, the Fed cut that rate three times, to its current level of just above 1.5 percent. It seemingly worked.

Today, with major negative economic consequences of the coronavirus looking increasingly likely, futures markets indicate that investors expect two or three further interest rate cuts this year.

There’s a debate underway among economists and market watchers over whether such moves are wise.

The Fed’s interest rate tools are poorly suited to protect the economy from shutdowns in production resulting from disease fears. Economists can’t invent a vaccine or slow disease transmission rates. On the other hand, you go to war with the recession-fighting tools you have, not those you might wish to have.

But assuming the central bank indeed cuts interest rates to try to buffer the economy from damage, it would find itself with interest rates of around 1 percent or lower, in an economy that is doing quite well, for the moment at least.

That leaves little room for further stimulus through that conventional tool. Even a mild downturn would mean the Fed would be looking to less conventional tools, including the quantitative easing policies used extensively from 2009 through 2014, and sending more explicit signals about its intention to keep rates low far into the future.

The United States, essentially, would look even more like Japan and Europe, where interest rates have fallen into negative territory and stayed there for years. In Germany, the 10-year government bond yielded negative 0.55 percent Thursday; in Japan it was negative 0.12 percent.

To be clear, conditions are hardly dystopian in Western Europe or Japan. Countries can maintain high living standards and decent job markets even with the low-growth future that Treasury bond rates are implying.



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