The subsequent market reaction only underscores the Fed’s impotence.
Since many infected people aren’t being tested, the actual number of cases has to be much higher than the official number of 4,226 infections. Therefore, if the number of infections keeps rising at the same pace as we’ve seen in the past couple of weeks, by early April millions will be infected.
In that case, a surge in serious coronavirus infections would overwhelm the medical system, resulting in a tragically greater number of unnecessary deaths. This is why epidemiologists are so focused on “flattening the curve” of infections by bringing down the rate of infection, so that fewer people will be very sick at one time.
At this point in the progress of the pandemic, the only way to do this is to have draconian and widespread shutdowns of places where people meet (bars, restaurants, schools, gyms and more), decimating business revenues and throwing people out of work. These cascading closures across the economy will necessarily cause a breakdown in demand, making a recession increasingly probable because of a demand shock to the economy.
In a matter of days, therefore, the supply-chain-disruption-driven threat of recession that worried many until a couple weeks ago — even though the economy was actually relatively resilient in this regard — has been superseded by mandated demand destruction, which is likely to railroad the economy into a contraction. A recession is increasingly unavoidable.
In such a recession, Fed rate cuts are fairly useless. The travel, tourism and hospitality industries that are being slammed by the new restrictions — as well as a citizenry hunkering down at home, increasingly afraid to mingle — can’t be spurred to consume more by the ability to borrow at slightly cheaper rates.
Rather, it is high time for Washington to get its act together with regard to testing and organization to prepare for the brunt of hospitalizations. At the same time, urgent measures are needed to support small and medium-sized businesses at risk of failure, along with their employees faced with the sudden loss of their livelihoods.
While some of the Fed’s moves will help to improve market functioning, the rate cuts themselves amount to a grand — but empty — gesture that the markets have already judged to be pointless.