Coronavirus Response Ramps Up Ahead of Economic Impact

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Special Guest Blogger: Tim Kearney

Markets are digesting the swift-moving — and sometimes conflicting — news about the coronavirus: local government responses to quell its spread, treatment efforts and economic countermeasures from the federal government and Federal Reserve. It’s important to remember that the regular data flow is useful to gauge how the economy was going into this situation, but much has changed since those data were recorded. It’s the overall government response that will drive events over the next four to six weeks.

Since whole industries will see major drops in production, by definition, the economy will go into a recession: the data from China give us our first glimpse of this effect. Given that scenario, the economy’s real interest rate has fallen and hence bond yields are down, appropriately. That drop in the real rate means that the Fed was right to move quickly, to keep up. The Fed also is marshalling its resources as lender of last resort to shore up the short-term credit markets, including actions that appear to be putting cash into people’s hands. That is a very good move.

In the interim, businesses are likely to hoard labor and access credit lines. When it becomes clear that this will be a temporary setback — as China and South Korea appear to be showing — then the markets and economy can stage comebacks. Meanwhile, monitor the economic data, the virologists and the government for clues of what to expect.

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