What the Coronavirus Demands of the Fed
The bank may not be able to do much about a supply shock, it has the tools to fight a demand shock.
Maybe the Fed can help.
Photographer: Scott Heins/Getty Images North AmericaU.S. markets recovered somewhat on Monday as investors’ hopes brightened that there might be a coordinated response among the world’s central banks to the coronavirus outbreak. At the same time, there are warnings that there is little that the central banks can do to contain the economic damage.
The key to understanding this debate is whether Covid-19 creates more of a “supply shock” (a decrease in the capacity of businesses to make things) or a “demand shock” (a decline in the ability of consumers to buy things). The best answer is, both. And while the U.S. Federal Reserve may not be able to do much about a supply shock, it has the tools to fight a demand shock — if it is willing to use them.