The U.S. Federal Reserve has gone ahead with lowering interest rates as an emergency measure as share prices have plummeted on a global scale following the spread of infections with the new coronavirus.
The Fed took such an action for the first time in 11 1/2 years since the financial crisis triggered by the collapse of U.S. investment bank Lehman Brothers. The range of latest cuts was twice the normal level. In other words, the U.S. central bank has taken a drastic measure to respond to the viral outbreak as it would with a financial crisis.
Prior to the move, the Group of Seven (G-7) major economies announced a joint statement saying that they "are ready to take actions, including fiscal measures where appropriate, to aid in the response to the virus and support the economy during this phase." The G-7 apparently tried to take the lead in putting an end to the global market upheaval.
There are predictions that the global economy will dip to negative growth in the January-March quarter of 2020 because of the impact of the coronavirus. A decline in stock prices could cool corporate and consumer sentiment, further worsening the economy. The G-7 needs to join hands to help stabilize financial markets.
Despite the latest interest rate cuts, U.S. stock prices at one point dropped by nearly 1,000 points. Concerns persist about the global market as shown in the recent Tokyo Stock Exchange fluctuations.
One of the factors behind such volatile markets is that the Fed's unusually drastic cuts in interest rates ended up fueling speculation among investors that the impact of the coronavirus on the economy may be far more serious than assumed.
Federal Reserve Chair Jerome Powell hinted at the possibility that the central bank will further lower rates. However, since the Fed's policy rate is already low, there is only limited space for further cuts.
What is worrisome is that the intensions of President Donald Trump, who has pursued "America first" policies, appear to lie behind the latest rate cuts.
Trump has blatantly sought a weaker dollar that would be favorable for U.S. exports, and repeatedly urged the Fed to slash interest rates. He remained unsatisfied with the central bank's latest cuts and urged the Fed to implement further monetary easing. The Fed has emphasized that it took the latest action at its own discretion, but if Japan and Europe become wary of a stronger yen and euro, the G-7 nations would fail to keep pace in stabilizing financial markets.
Close attention should be focused on how the Japanese and European central banks, which are scheduled to hold a regular meeting as early as next week to determine their monetary policies, will react to the current situation. Both the Bank of Japan (BOJ) and the European Central Bank have already introduced negative rates, leaving little room for further cuts.
If the BOJ were to expand its negative interest rate policy, it would limit the profitability of relatively weak local financial institutions. As tourism and other industries outside major cities have been hit particularly hard by the viral outbreak, the BOJ needs to consider effective ways to help support regional economies.
Even though policy options to tackle the situation are limited, the prolonged outbreak of the virus could further cool down the economy. The capacity of Japan, the United States and Europe is being tested on how they can implement effective measures to dispel concerns among traders.