The impact of the coronavirus outbreak on the global economy has been enormous, and central banks are now taking steps to cushion the economy from crashing. On Sunday, the Federal Reserve announced that it was cutting its benchmark interest rate to almost zero and also indicated that it will buy Treasury and mortgage bonds worth $700 billion.
Global economies going the Japan way with near-zero rates
Policymakers in developed nations are finding themselves in a hole, and it seems like they are turning into Japan. The interventions from central banks have not turned things around as before with growing pleas for governments to use their posers to boost economies in the near term. However, going by the Japanese lesson, it means they have to intervene for a while.
Larry Summers, the former US Treasury Secretary, stated that the US is basically at the Japanese place and that it is difficult to get out. In Japan, for decades, benchmark interest rates have always been almost zero, but businesses and households have been adamant to borrow. This, therefore, had left the monetary policy devoid of any traction. As a result, the government has been stepping in to finance the little growth experienced with deficit spending.
Cutting interest rates doing little to reassure markets
Since the last global financial crunch, most of the developed nations have been in the Japan situation and that the effects of coronavirus outbreak are just accelerating the convergence. For instance, Europe had got used to slow growth as a result of negative borrowing, and although the US is not there, yet there are indications that it’s on that path.
Despite central banks stepping in to help the situation, it might not be of much help. This is evident from last week’s move by the Fed to ease the policy, which did less to reassure markets. The US Federal Reserve Chair Jerome Powell admitted that the interest rate cuts will not fix supply chains that have been plunged into chaos as a result of the coronavirus outbreak.