Monetary policy around the world
- The Fed has just announced a 50 basis points cut in interest rates. In addition, yesterday it bought $7,499 billion of Treasury bills in its efforts to provide liquidity to the dollar repo market.
- The People’s Bank of China (PBC) lowered the medium-term lending facility and the loan prime rate by 10 basis points successively. In addition, the PBC has set up RMB300 billion of special low-cost central bank lending to major national banks and certain local incorporated banks in 10 key provinces.
- Australia’s central bank cut interest rates by 25 basis points.
- The Bank of England hinted that it could cut interest rates at the next meeting, and that capital requirements for banks might be adjusted to protect against inadvertent credit tightening for companies suffering from disrupted cash flows.
- The Reserve Bank of India stands ready to take appropriate actions to ensure orderly functioning of financial markets, maintain market confidence and preserve financial stability.
- The ECB is closely monitoring developments and their implications for the economy and medium-term inflation. It also stands ready to take “appropriate and targeted measures, as necessary and commensurate with the underlying risks.”
Central banks and Coronavirus
By: Frances Coppola
The case for reducing interest rates
Narayana Kocherlakota argues that the outbreak has triggered a huge burst of risk aversion in financial markets. This risk aversion will manifest itself as a drag on household and business spending on travel and many other services. If this risk aversion continues to grow, it will create its own negative dynamic: As consumers and businesses respond to alarming events, they pull back, causing growth to slow still more. This cycle is why the economic threat from the virus is so unnerving. And this is why the Fed needs to lower interest rates proactively.
Fed Is Losing Its Credibility to Coronavirus
By: Narayana Kocherlakota – University of Rochester
The case for a different policy reaction
John Cochrane doubts whether lower rates can help alleviate the negative economic impact of the coronavirus. Rather, he advocates a pandemic-induced financial crisis plan, that forestalls bankruptcies and insolvencies where possible, and provides liquidity to the right sectors. He adds, that judiciously targeted bailouts are really the only way to keep businesses and people from going bankrupt given the absence of pandemic insurance.
Then we have to figure out how to prevent the atrocious moral hazard that such interventions produce. Pandemics are going to be a regular thing. Ex-post bailout reduces further the incentive for ex-ante precautionary saving. Too good a fire department and people store gasoline in the basement.
Corona virus monetary policy
By: John Cochrane – Stanford University
