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Concern about the economy is growing with the consequences of the novel corona virus. The Federal Reserve (Fed) cut its key interest rate significantly on Tuesday by half a percentage point. It is now in the corridor of 1 to 1.25 percent. It is the Fed’s first emergency rate cut since the global financial crisis.
Federal Reserve chief Jerome Powell said it can be seen that the corona virus is already affecting growth in many countries and global financial markets. The extent of the impact on the US economy is still “highly uncertain,” he said. So far, there have only been reports of disruptions in global supply chains and a decline in the tourism and travel industry, Powell told journalists. The US economy is still doing well. However, the central bank acted preventively to avoid a possible growth slowdown, said Powell. “We believe that our actions will give the economy a significant boost,” said Powell.
The seven major industrialized countries (G7) expressed their willingness to cushion possible economic consequences. The spread of the novel virus and the effects on financial markets and the economy would be closely monitored, said a statement by the finance ministers and central bank heads of the G7 after a conference call. Governments are ready to take fiscal measures too – for example, higher government spending.
“Given the potential impact of Covid-19 on global growth, we reaffirm our commitment to use all appropriate policy tools to achieve strong and sustainable growth and to protect against downside risks,” it said. The G7 group includes the United States, Japan, Germany, France, the United Kingdom, Canada and Italy.
The stock markets reacted violently in part after the Fed decision. The New York stock market had a volatile first hour of trading. The German leading index DAX received new upward impulses in the afternoon before close of trading. After the rapid descent of the past week, he temporarily recovered.
Economists, however, dampened expectations of the success of central bank crisis interventions. “Unlike the global financial crisis, central banks will be able to help little to combat the economic damage caused by the corona virus,” said Marcel Fratzscher, President of the German Institute for Economic Research (DIW). The biggest economic problem is the collapse of global value chains and a lack of consumer confidence.
The chief economist at Dekabank, Ulrich Kater, argued similarly: “The immediate economic problems lie in a temporary simultaneous loss of supply and demand due to an external shock, worldwide. On the other hand, the central banks can do little directly. ”
Ifo President Clemens Fuest warned of massive consequences for the economy if the virus spreads. “We have a significantly increased risk of recession,” said Fuest in Berlin. There is currently a “supply and a demand shock” coming together, this could be a dangerous mix. Politicians urgently need to send out a signal and make it clear that they are doing everything that is necessary.
For example, an expansion of short-time work benefits and emergency loans for companies affected by the interruption of supply chains are possible – this could prevent bankruptcies. This affects sectors such as mechanical engineering or the automotive industry, but also service companies.
The rapid spread of the virus has already had noticeable consequences for Europe’s airlines. Several airline bosses reported a sharp decline in booking numbers at an industry meeting in Brussels.
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