It is not yet clear that the coronavirus will create prolonged shock. But if infections continue to spread, it could keep home workers and production at bay, causing a more prolonged drag on growth. Market indicators suggest about a 40% chance that an American recession may begin next year, according to JPMorgan Chase models.
As Wall Street acknowledges the Fed’s limited ammunition and growing risks, investors are increasingly pessimistic. The shares were down 1.7% on Friday, although the S&P 500 rose for the week.
If the poor economic outcome in which investors are sketching out materializes and the Fed’s exhausted options are not supplemented by heavy budget pressure, this would pave the way for a more painful slowdown – a process that costs jobs and slows business for a longer period.
“The question here is: can we design a new monetary system here?” Andrew Levin, professor of economics at Dartmouth, said Friday in New York. “We can’t just say,” None of these things are very good, so let’s just raise our hands and hope that fiscal policy comes to the rescue. “”
He added, “We have to be ready, hopefully the best, prepare for the worst.”
Also in New York on Friday, President of the Federal Reserve Bank of Boston, Eric Rosengren, suggested a potential remedy – likely to spark a conversation between his colleagues. Officials may need to buy assets other than government bonds to counter the next recession, he said in a speech.
Buying bonds from the central bank strengthens the economy by lowering long-term debt rates, making borrowing cheaper and spurring spending. Because the yield on 10-year Treasuries fell well below 1% on Friday, reaching lows never seen in the United States, the resumption of government-backed bonds could have much less impact on the environment. ‘to come up.
If the Fed cuts its key rate to near zero, said Rosengren, the 10-year Treasury rate may also fall to the lowest.