Breakingviews - Fed easing shocks more than it awes

Federal Reserve Board building on Constitution Avenue is pictured in Washington, U.S., March 19, 2019. REUTERS/Leah Millis

LONDON (Reuters Breakingviews) - Jerome Powell has been criticized by President Donald Trump for doing less than euro zone peers to stimulate the economy. Spurred by the rapid spread of coronavirus, the U.S. central bank chief is taking the initiative. He could have used some help from the other side of the Atlantic.

The Federal Reserve cut interest rates by half a percentage point on Tuesday, citing the economic risks posed by the coronavirus. Just hours before the emergency move, which was announced between scheduled policy meetings, the Group of Seven leading industrial nations said they would use appropriate policy tools to safeguard growth. Easing from the provider of global financial liquidity will have a beneficial impact beyond the borders of the world’s largest economy.

But just over a decade ago, the G7 was doing much more. True, today’s problems are very different from the ones economies faced after the financial crisis, which could be soothed by coordinated injections of liquidity and lower interest rates. Disruptions to supply chains and people shut up at home to avoid infection are another ball game, and require government spending to mitigate the impact. That’s no doubt why U.S. stock markets’ initial rally went into reverse within an hour. Moreover, given policy rates are already below zero in Japan and the euro zone, it’s unclear how much further they could be cut.

But even a token move might have helped shore up confidence in the G7’s ability to act in unity when needed. Easing would be welcome from the European Central Bank. Italy, the euro zone’s third biggest economy, suffered a contraction in its gross domestic product in the fourth quarter, even before the impact of the coronavirus was felt. Japan, which has far closer trade ties with hard-hit China and South Korea, could also follow Powell’s lead.

True, ECB chief Christine Lagarde may want to put together a package of measures, including perhaps specific ones directed at small- and medium-sized enterprises. And her ability to deliver even a token rate cut is hampered by dissent from the likes of Robert Holzmann, the Austrian central bank chief, who said earlier on Tuesday that he wouldn’t support such a move. But G7 coordination is more credible when it’s seen as well as talked about.


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