Fed Powell faces confusing crisis with no simple solution

WASHINGTON Jerome Powell faces his toughest test to date as head of the Federal Reserve in a largely modified atmosphere compared to what his predecessors faced. This makes an uncertain situation even more difficult.

Powell announced a surprise drop in the half-point interest rate on Tuesday, which cut the Fed's key rate to a range of only 1% to 1.25%. It was the first time the central bank had cut rates between scheduled policy meetings since the 2008 financial crisis. And it was the Fed's most pronounced rate cut since.

The Fed's unusual move was a response to the economic fears and dizzying dips in the stock markets that are reminiscent of the crisis that nearly overturned the financial system in 2008. Yet the circumstances are radically different. On the one hand, uncertainty about the impact of the virus How serious will it be? How long will it last? makes it particularly difficult to find a solution.

In addition, Powell has a more controversial relationship with President Donald Trump than his predecessors Ben Bernanke and Janet Yellen with Presidents George W. Bush and Barack Obama. This threatens to complicate the development of a unified response.

International cooperation with other central banks could also prove to be more difficult to reach now, as most of the other large industrialized economies have already cut their borrowing rates in negative territory and have ; limited room for maneuver.

"The real nature of the coronavirus threat, real and perceived, is not yet quantifiable," said Mark Haefele, chief investment officer of the Swiss bank UBS. This makes it difficult for policy makers around the world to know if they have gone far enough to support their economies.

For now, the Fed chairman is benefiting from a bipartisan stock of goodwill on Capitol Hill which escaped Bernanke and Yellen, in part because the U.S. economy and the job market in particular have shown lasting strength during his first two years in office.

All of this could collapse if the economy were to succumb to the pressures resulting from the coronavirus. Most economists still argue that the U.S. economy can avoid a recession if the virus remains relatively contained. But they have greatly reduced their forecasts for this year.

Goldman Sachs economists now expect growth to barely reach an annual rate of 0.5% in the first half of 2020. Most analysts expect the US economy is growing, at best, by about 1.5% this year. It would be the weakest annual expansion since the end of the Great Recession in 2009.

The many unknowns about the impact of the virus make it particularly upsetting for the Fed, according to economists. Will consumers avoid sporting events, cinemas and other public places? Will their spending, which fuel more than two-thirds of the US economy, steadily weaken?

One problem for the Fed and other central banks is that there are limits to their ability to cope with the economic impact of the virus, from closed factories to canceled business trips to chain stores. supply of disrupted businesses. Lower borrowing rates do not directly solve these problems.

These uncertainties contributed Tuesday to a further sharp decline in the stock markets. The Dow Jones industrial average fell 786 points, or 2.9%, after a brief push immediately after the Fed announced its sharp rate cut Tuesday morning.

Bond yields also fell, with the yield on the 10-year note falling below 1% for the first time in history. Investors around the world have pushed up prices of bonds that move in the opposite direction of returns as they seek to protect themselves from the turmoil in the stock market.

A vivid example of the altered world in which Powell operates came just hours after announcing the cut, when Trump sent a typically critical tweet asking the Fed to do more easing and cutting!

For Trump himself, the coronavirus triggered his presidency's most serious economic challenge, which could peak in the middle of his re-election campaign. Trump has regularly presented the health of the stock market as a barometer of the success of his economic policies.

Later Tuesday, on the White House lawn, Trump complained that Powell had given a very bad signal at his press conference when, according to the President's interpretation, Powell hinted that 39; they weren't going to do any more. In fact, many economists expect the Fed to cut rates at least twice more at its next meetings in March and April.

During the 2007-2009 financial crisis and the Great Recession, Presidents Bush and Obama never publicly attacked Bernanke, who worked closely with the Secretaries of the Treasury of the two administrations to develop remedies for the financial crisis .

At his press conference, Powell said the central bank was focusing on its goal of supporting the economy and added: "We are never going to take political considerations into account.

Many analysts expected other central banks to act in concert with the Fed this week, cutting their own rates and presenting investors and businesses with a united front that could have boosted confidence .

Instead, the Fed acts mainly on its own, for now. The Australian central bank announced on Tuesday that it was lowering its official rate to a record low of 0.5%. But several major central banks, including the European Central Bank, the Bank of Japan and the Swiss National Bank, have already lowered their borrowing rates in negative territory. The ECB and BoJ are also buying bonds and other financial assets in an attempt to revive their economy. They face greater opposition to new cuts.

The Fed ruled that it could not wait for the ECB in particular to be ready to move, said Krishna Guha and Ernie Tedeschi, analysts at Evercore ISI, in a research note.

The last time the Fed intervened between its political meetings, it coordinated with five other central banks. In November 2011, the six central banks agreed to reduce the cost of borrowing in dollars from foreign banks.

Powell tried to find a balanced tone at his press conference, making it clear that the Fed was aware of the threat and was ready to support the economy, while stressing that the US economic fundamentals are solid.

The virus and the measures that are being taken to contain it will surely weigh on economic activity here and abroad for some time, he said. So we saw a risk to the economy and we chose to act. "

Meanwhile, members of the US Congress are finalizing an emergency bill of $ 7.5 billion to fund the government's response to the coronavirus epidemic in a rare act of bipartisan cooperation.

Legislation would speed up development of a coronavirus vaccine, pay for state and local preparation, help other countries fight the epidemic, and seek to ensure that the vaccine is affordable when ready, although it may take a year.

Mr Powell said that lower rates can help maintain credit, especially for distressed companies already in debt that would otherwise face higher borrowing costs. And he suggested that Fed intervention would boost consumer and business confidence and give a significant boost to the economy.

Around the world, business is slowing down and, in some places, stopping completely due to the virus. Chinese factories are struggling to slowly recover. Many European vacation destinations have been virtually deserted as leisure and business travel have declined. And big companies around the world are preparing for the risk that the economic landscape will deteriorate before improving.

Earlier on Tuesday, seven major economies pledged to use all the appropriate tools "to deal with the spread of the coronavirus, but did not announce any immediate action.

The group of major industrial countries, named G-7, has declared its readiness to take action, including fiscal measures where necessary, to help respond to the virus and support the economy.

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Economics writer AP Martin Crutsinger contributed to this report.