Increasing fears over the spreading coronavirus have investors on edge, and while the White House maintains that the United States is prepared to handle an outbreak, the Federal Reserve has come under scrutiny as the market rapidly loses liquidity.
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The Dow Jones Industrial Average fell more than 3,500 points in its worst week since the 2008 financial crisis. And the Federal Reserve is complicit in that drop, experts say.
Jerome Powell, the Federal Reserve chair, issued a statement on Friday, indicating that the central bank was weighing a rate cut.
“The Federal Reserve is closely monitoring developments and their implications for the economic outlook,” Powell said. “We will use our tools and act as appropriate to support the economy."
The benchmark federal funds rate is between 1.5 percent and 1.75 percent. The next meeting of the Federal Open Market Committee is expected to occur next month.
But experts say the central bank needs to act sooner.
David Blanchflower, Dartmouth economist and former Bank of England Monetary Policy committee member, said that the Fed is already behind the eight ball since the market is now pushing it to respond.
“There is an argument here for the Fed to act immediately and not wait until the March meeting,” Blanchflower told FOX Business. “If they don’t act there will be a market reaction … What’s the risk of acting? Probably not much.”
The risk of inaction, however, could be high. The market has fully priced in a 25 basis-point cut, and a 50 percent chance of a 50 basis-point cut. In fact, investors are expecting as many as four rate cuts by the end of the year.
Informal economic adviser to the Trump team Stephen Moore, who is a senior fellow at the Heritage Foundation, said the Fed should have cut rates “three days ago” and that the main priority needs to be getting liquidity back into the markets.
“They should not wait,” Moore told FOX Business. “[The Fed is] hugely complicit in the market selloff by waiting so long.”
Moore argued for an immediate 50 basis-point cut.
Such a move would not be without precedent. In the midst of the 2008 the financial crisis, the Fed and five other central banks called an emergency meeting in Oct. 2008 to cut rates by one-half point.
Beyond that, Blanchflower says the White House's economic response will depend on how the situation evolves. Currently, it is a supply shock, but whether it becomes a demand shock, and consumers stop spending, is still unknown.
Moore noted that the most important thing is getting the virus contained after which the markets are expected to bounce back.
In the United States, 62 people had been infected, including people who have returned to the country from affected areas. The first case of an individual infected without a known cause was identified by the CDC on Wednesday in California, sparking fears of community spread.
The CDC has cautioned that the United States should be prepared for a widespread breakout.