Federal Reserve, other central banks cut interest rates

Central banks around the world, including the U.S. Federal Reserve, have lowered interest rates to support their respective economies amid a rapidly spreading coronavirus — and more are expected to follow suit.

But investors and economists said there’s not much monetary policy can do to save the global economy, especially when some major central banks — such as the European Central Bank and Bank of Japan — have already cut interest rates into the negative territory.

“The fact is, we’re coming into this crisis with far less ammunition globally. It’s not just Europe or Japan, even in China they have much less ammunition than the last time they had to launch a stimulus package,” Alex Wolf, J.P. Morgan Private Bank’s head of investment strategy in Asia, told CNBC’s “Squawk Box Asia” on Wednesday.

Wolf’s comment came as the new coronavirus — also called COVID-19 — is quickly spreading globally and beyond its epicenter in China. Concerns over the economic hit from the virus resulted in the Fed making an emergency rate cut of 50 basis points on Tuesday.

Lowering interest rates make borrowing costs cheaper and could encourage businesses and households to take loans and spend, which will in turn stimulate the economy.

Before the Fed’s surprise cut, central banks in Australia and Malaysia also took rates lower. Analysts expect more to do the same. Major central banks that have scheduled meetings in the coming weeks include the ECB, BOJ and Bank of England.

Brian Martin, senior international economist at Australian bank ANZ, outlined in a Wednesday report the possible moves by those three major central banks:

  • The European Central Bank is expected to cut its deposit rate by 10 basis points before its next meeting scheduled on March 12. The ECB’s current deposit rate is at a record low of -0.5%
  • The Bank of Japan could also cut rates deeper into negative territory
  • The Bank of England is expected to cut rates by 25 basis points, possibly before its Mar. 26 meeting

But rates globally have generally stayed low — with some at negative levels — since they were cut after the global financial crisis.

That means some central banks may not have room to take rates much lower, said analysts. For those that still do, any rate cut may not be effective in lifting economic activity, they added.

If this turns into a pandemic that engulfs the United States, it’s pretty difficult to envision the U.S. economy getting through without a full-blown economic recession, which means the entire global economy will be in recession.

Mark Zandi

chief economist at Moody’s Analytics

Roger Aliaga-Diaz, chief economist for Americas at investment giant Vanguard, said the latest cut by the Fed was “premature” especially given the “high uncertainty around the potential implications” of the virus outbreak. 

“Based on the economic and virus-related data available today, we feel this is a high-risk bet. The Fed may find themselves in a difficult position should conditions deteriorate further, finding themselves required to act forcefully in the weeks ahead,” he said in a statement. 

Still, others like Jurrien Timmer, director of global macro at Fidelity Investments, said the Fed — which some have said is the most important central bank in the world — did “the right thing” by lowering interest rates.

The coronavirus outbreak “is a sudden systemic shock to the global economy and probably also to the U.S. economy, certainly as the number of cases start going up,” Timmer told CNBC’s “Street Signs Asia” on Wednesday.

The Fed’s benchmark funds rate is now targeted at a range between 1% and 1.25% after Tuesday’s cut, and Timmer said the central bank could cut by another 25 basis points to 50 basis points in the “coming weeks or months.”

But as the rate inches closer to zero, investors would be looking for the U.S. government to step in with more measures, said Timmer. Furthermore, monetary policy alone can’t solve a global health issue and other economic problems, such as disruptions in manufacturing activity, he added.

A response from the U.S. and other governments to support the economy is especially crucial if the spread of the coronavirus becomes a pandemic, said Mark Zandi, chief economist at Moody’s Analytics.

The World Health Organization defines pandemics as “the worldwide spread of a new disease.” Moody’s Analytics said in a report last week that the odds of the outbreak turning into a pandemic has doubled from 20% to 40%.

“If this turns into a pandemic that engulfs the United States, it’s pretty difficult to envision the U.S. economy getting through without a full-blown economic recession, which means the entire global economy will be in recession,” Zandi told CNBC’s “Squawk Box Asia.”

“And if that’s the scenario, then that is going to be very hard on all kinds of risk assets: stock prices, credit spreads — everything is going to feel it,” he added.

Some governments have already made plans to increase spending to support their economies. Hong Kong announced measures that include a cash handout of 10,000 Hong Kong dollars ($1,287) to all permanent residents aged 18 and above, while Singapore has planned reliefs targeted at businesses most affected by the coronavirus outbreak.  

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