Coronavirus outbreak could spark more interest rate cuts, economist Benn Steil says

Finance news

Council on Foreign Relations economist Benn Steil says the Federal Reserve’s half percentage point cut in interest rates may not be enough to keep the economy on track as the coronavirus spreads.

“None of us would be surprised to see the Fed cutting further in the coming months,” the council’s senior fellow and director of international economics told CNBC’s “Trading Nation” on Thursday. 

Steil told “Trading Nation” in early February that policymakers could slash rates by 50 basis points as coronavirus fears began growing. Four weeks later, the Fed did just that on Tuesday.

“What the Fed can do is dampen demand shocks that feed off of the supply shocks. In other words, workers getting their hours cut [and] getting laid off — cutting spending,” Steil said. “By bringing down the cost of borrowing and expanding access to credit facilities, they can expand lending to consumers and businesses, perhaps juice the housing market and keep demand up.”

Yet, the move didn’t minimize the market’s wild swings.

The Dow plunged 969 points or 3.6% on Thursday. The Dow, S&P 500 and tech-heavy Nasdaq fell back in correction territory, which reflects a 10% or more drop from 52-week highs.

Plus, the 10-year Treasury Note yield on Friday briefly fell below 0.7% for the first time ever. 

Steil said the Fed, which holds its next policy meeting on March 17-18, could take additional steps beyond rate cuts to help the economy weather the coronavirus impact.

“The Fed, of course, could do much more. It’s got about 125 basis points more to go before we get zero rates,” he said. “Then, it could stop its balance sheet reduction and perhaps start expanding its balance sheet again through asset purchases.”

According to Steil, policymakers are unlikely to take rates into negative territory.

“There isn’t firm evidence that it really helps that much compared to other tools central banks have, such as forward guidance and asset purchases,” Steil said. “There’s not too far you could go below zero. Once you get to about negative 50 basis points, then you see banks and consumers starting to move into cash and vaults.”