MNI EXCLUSIVE:Fed Has Limited Tools As Virus Hits-Ex Officials

By Evan Ryser

     NEW YORK (MNI) - Former Fed officials say the Federal Reserve has limited

policy room to respond to the potential economic impact of coronavirus, telling

MNI the U.S. government will have to step in with significant fiscal stimulus

such as tax cuts.

     Former Fed Board research director David Wilcox said more Fed easing was

likely on the way, following its 50-basis-point intermeeting cut. Steven

Friedman, former director of market analysis at the New York Fed, told MNI the

U.S. economy would contract in Q2 and that businesses would require loans to

stay afloat.

     Tuesday's emergency easing may have been intended to give the FOMC some

flexibility -- not being so big as to alarm markets, and small enough to be

reversed relatively easily if the situation improves, Wilcox said.

     "They'll probably cut by another 25 basis points [in March]," he said,

adding that this might not be enough to address the impact of the economic

disruption caused by the virus.

     "If the situation becomes serious, fiscal policy makers are going to have

to provide a broad-based response to weak aggregate demand by cutting taxes,"

Wilcox said, expressing a preference for cutting the payroll tax by a couple of

percentage points.

     "If this were a movie the Federal Reserve would be a supporting actor whose

line in the credits would appear pretty far down in the list," he said, calling

the tools remaining to the Fed "worrisomely narrow." These include rates cuts

but also large-scale asset purchases and yield curve control -- which has been

discussed during the Fed's ongoing framework review.

     While the Fed may have more monetary firepower to respond to economic

disruption than the Bank of Japan and the European Central Bank, Wilcox said,

"The Fed doesn't have enough. There's no question about that."

     "Monetary policy can't go home and go to sleep, no question about that," he

said. "But it really is just a secondary or a supporting actor in this saga."

     Wilcox pointed to economic literature arguing that when a central bank is

running low on ammunition it should make optimal use of it by firing more

quickly than normal rather than attempt to conserve it.

     --LOWER BOUND

     "Nobody knows for sure whether the circumstances are going to get dire

enough to warrant the Fed dropping the federal funds rate to zero," Wilcox said.

     Friedman, now at MacKay Shields, saw a 40% chance of a global recession

this year. Small businesses will require liquidity, he said.

     "Cutting rates doesn't solve this issue, but it does provide support to

financial markets ... The backstop is really going to be supporting those small

business and households that may face cash pressures."

     An USD8.3 billion coronavirus funding bill signed by President Donald Trump

Friday morning is not big enough, Friedman said.

     The bill enables the Small Business Administration to provide an estimated

USD7 billion in low-interest loans, in addition to funds for research and

development and purchases of vaccines and medications.

--MNI Washington Bureau; +1 202 371 2121; email: evan.ryser@marketnews.com

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