Federal Reserve should not try to fight the coronavirus
By Karen Petrou

At the end of last week, Federal Reserve chairman Jay Powell cryptically assured markets that the Fed would do the “appropriate” thing to counter Covid-19’s plague on equity prices. This is a carefully crafted promise of nothing specific, ensuring that the Fed can do anything it wants. Even so, investors have taken it not only as assurance that US short-term interest rates will drop at least a full percentage point, but also that the Fed will expand its “whatever it takes” promise for financial markets into a no-holds-barred backstop for stocks. If the Fed does step in, the aptly named dead-cat bounce in which prices recover only for a short while, should not be mistaken for resurrected animal spirits. No amount of rate cuts will cure a single coronavirus patient, nor will anyone frightened of illness decide to buy a new house, a car, or even a night out at a restaurant. Markets that are priced for a rescue ignore reality at great peril, and central banks that encourage them to do so run even greater risks. The first problem with a central-bank rate cut as a restorative for markets is that it will not work.