US recession still a risk but the central bank’s moves deserve applause, says former Fed official

The U.S. Federal Reserve’s latest moves — which include cutting interest rates to zero — deserve applause, even though the American economy could still head into a recession given the uncertainty around the coronavirus outbreak, a former Fed official said.

“I think recessionary conditions are definitely a risk and we’re dealing with so much uncertainty now on how this virus situation unfolds and what the economic impact turns out to be, nobody really knows,” Dennis Lockhart, Atlanta Fed president from 2007 to 2017, told CNBC’s “Squawk Box Asia” on Monday.

“I think we should applaud the Fed for, in a way, getting as much ahead of the curve as they can,” he added.

The Fed on Sunday announced a suite of measures aimed at cushioning the U.S. economy from the virus outbreak. Those measures include lowering the Fed funds rate target to between 0% and 0.25% — a whole percentage point lower — and launching a $700 billion program to buy Treasurys and mortgage-backed securities.

That announcement came less than two weeks after the Fed cut its target for its benchmark funds rate by 50 basis points to between 1% and 1.25%, in another surprise move.

The Fed and many central banks around the world have cut interest rates to mitigate the economic impact of the new coronavirus outbreak. COVID-19 has infected more than 150,000 people and killed at least 5,746 people globally, according to the World Health Organization.

Lockhart said the Fed has now “spent all their bullets from an interest-rate cut point of view.” It remains to be seen whether that’ll leave the central bank with less options to support the U.S. economy in the future, he added.

Before the Fed’s moves on Sunday, Goldman Sachs analysts downgraded their forecast for the U.S. economy. The analysts said they expect the U.S. economy to register zero growth in the first quarter, contract by 5% in the second quarter before recovering sharply for the rest of 2020. 

Other analysts said it’s hard to know whether the latest moves by Feb could help the U.S. avoid a recession.

Randy Kroszner, who was a Fed governor from 2006 to 2009, said the Fed still has some other tools they can use other than cutting interest rates. But other measures, including fiscal and regulatory policies, are needed to overcome such “extraordinary circumstance.”

“The Fed can do a lot to provide liquidity to do the markets, but it can’t solve a disruption in supply chain, it can’t cure a virus,” he told CNBC’s “Squawk Box Asia” on Monday.

He added that it’s “crucial” for policies on both federal and state level in the U.S. to focus on health issues by making sure the health-care sector has the necessary equipment and expertise so that people can get tested. In addition, policies should also focus on some “economic support issues” such as helping people who lost their jobs, he said.

“The key is not just spending money but spending money in a way that is focused on trying to help the problems,” said Kroszner.