Mar 13, 2020 - Economy & Business

The world needs Trump to save it from a coronavirus-induced recession

The Fed has clearly gotten the message being sent from financial markets — "OMFG!!!" — and has acted accordingly.

The state of play: The U.S. central bank is responding to the coronavirus outbreak as if the country is in a crisis, first by declaring an emergency 50 basis point rate cut last week, and on Thursday by announcing $1.5 trillion in injections to the systemically important repo market, on top of already increased funding injections.

  • Congress and the White House are not on the same page and have committed what one former Fed official called "gross negligence" with their response so far.

Why it matters: A recession is starting to shift from possible to overwhelmingly likely with the only question being how bad things will get.

What's happening: "At best the Fed can buy time in the markets and put a floor in the selloff, but a fiscal response is required," Nela Richardson, investment strategist at Edward Jones, tells Axios. "This is a biological event. This problem did not start in the financial markets and the solution won't be found there."

  • Danielle DiMartino Booth, CEO of Quill Intelligence and a former adviser to the Dallas Fed, is expecting "crisis era" policies from the Fed, but Thursday's market selloff — the worst since 1987's historic Black Monday — shows just how limited the central bank is.
  • "The Fed loaded and fired a bazooka and it was not a big enough shock to stanch the bloodletting in the stock and more importantly, credit markets," she tells Axios.

Between the lines: The wave of red on Wall Street — the S&P 500 has fallen 27% from its record high, set just weeks ago — is not an assessment of the economy, Jim Paulsen, chief investment strategist at The Leuthold Group, says.

  • "There is no explanation for why the market is falling 5-10% a day," he tells Axios. "We’re not trading on any kind of reason or sanity, it’s just emotion and panic at the moment."

The bottom line: "The Fed will soon be largely sidelined," Mark Zandi, chief economist at Moody's Analytics, says in an email. "The onus for saving the economy from recession is now squarely on the Trump administration and Congress to provide a large, timely and well thought out fiscal stimulus."

  • Asked how confident he is it would get done, Zandi echoed the response of most economists who have spoken to Axios since the market meltdown began.
  • "Not confident at all. Recession is more than likely."

Go deeper: What the Fed has learned about the coronavirus outbreak

Go deeper

The Fed's $1.5 trillion injection may be just the beginning

Data: Investing.com; Chart: Axios Visuals

The Fed's actions on Thursday appear to have had a significant impact on the bond market and the currency market, where the dollar has reversed its slide against most major currencies after touching monthslong lows earlier this week.

The state of play: The dollar index, which measures the greenback's value against six global peers like the euro and Japanese yen, rose 1% Thursday.

Market overwhelmingly expects rate cut next month

Data: CME Group; Chart: Naema Ahmed/Axios

In one week, futures traders have gone from seeing virtually no chance of a rate cut at the Fed's next policy meeting to a more than three-quarters likelihood.

Why it matters: Economists aren't sure a rate cut would be effective at offsetting the damage from the coronavirus outbreak, and would put the Fed in a weaker position to bolster the economy should the U.S. fall into a recession.

Goldman Sachs expects a full percentage point of rate cuts from the Fed

Fed Chairman Jerome Powell. Photo: Sarah Silbiger/Getty Images

Fed chair Jerome Powell's statement on Friday afternoon that the U.S. central bank was "closely monitoring developments" and would "act as appropriate to support the economy" has eliminated any doubt that the Fed will cut U.S. interest rates at its meeting on March 17–18.

What we're hearing: "A Fed cut in March appears nearly certain," analysts at Goldman Sachs said in a late Sunday note to clients.