Potential Moves That the Federal Reserve Can Make to Avoid a Coronavirus Recession

After a truly wild week on Wall Street, many eyes are watching Jerome Powell and the Federal Reserve to see what action they take to potentially help prevent the economy from slipping into a Coronavirus-based recession. U.S. equities bounced back strong on Monday, but there is still a lot of uncertainty in the market. Most investors and traders are hoping for and expecting another interest rate cut from the Federal Reserve, but the real question is would that actually help financial markets in the long-run?

There’s no doubt that the economy will see a large impact from the Coronavirus, but the Federal Reserve can also step in to possibly limit the damage. However, after dropping interest rates several times during a period of stable economic growth, is a rate cut really what our economy needs to move forward? We will be taking a look at some of the potential moves that the Federal Reserve can make to prevent a Coronavirus recession below.

Liquidity Injections & Rate Cuts

The decisions made by central banks like the Federal Reserve will always have a huge impact on the economy and our financial markets. There’s an old saying that traders love to mention, which is “Don’t fight the Fed”. This essentially means that traders and investors should base their moves with the Fed’s current monetary policy in mind. However, there are some economists that are opposed to additional liquidity injections and are afraid that the recent sharp drop in the market was actually a result of irresponsible monetary policy from the Federal Reserve.

There are pretty much two main things that the Federal Reserve can do to fight recession, and those are to either change interest rates or to buy or sell U.S. government debt. The most likely action that the Federal Reserve will take to potentially prevent a Coronavirus recession is to cut interest rates again. The last day of the Fed’s next monetary policy meeting is on March 18^th which is a date that might bring another rate cut to fruition. In fact, even though Fed officials are not committing to additional rate cuts, the market is essentially already pricing in a 50-basis-point cut. This comes after many of the central banks across the globe have already cut their rates to help ease Coronavirus concerns in global marketplaces.

A rate cut could be a good thing in the short term and help investors get over their concerns about the impact of the Coronavirus. However, some people also think that an emergency rate cut is not the way to go and that it could continue to artificially prop up equity valuations which are already extremely high. They believe that the previous liquidity injections made by the Fed have created large bubble in risk-based assets like the stock market and consumer credit market.

Even though it might seem like an emergency rate cut from the Fed is on the cards, it’s important for traders and investors to get ready for anything. While it’s true that lower interest rates could help businesses avoid Coronavirus-related decisions like layoffs, lower rates could also potentially make stocks more vulnerable to sharp drops in the future. Since we’ve already seen companies like Apple reduce their quarterly revenue guidance numbers, it’s clear that the Federal Reserve is on red alert. The question is will they make the right call?

A Key Decision

Only time will tell what the Federal Reserve ends up doing to protect the economy from a Coronavirus-based recession. The truth is that monetary policy really can’t do much in terms of fighting off a dangerous pathogen, but it can help to make investors feel a little less scared about the economic impact of the Coronavirus. Keep in mind that there are quite a few positive signs for the U.S. economy which suggests that things aren’t quite as bad as they seem. The unemployment rate continues to be low, incomes are rising, and the housing market continues to pick up steam. The real concern is how the Coronavirus will affect future economic growth and company earnings going forward.