Here’s Why the Federal Reserve Can’t Save Us From a Pandemic Recession
The Fed’s typical weapons of lowering interest rates and quantitative easing may not be as effective this time around
The Federal Reserve is the United States’ first line of defense against a recession. Unlike Congress, which controls taxes and government spending, the Fed can make changes in interest rates on a moment’s notice — even late on a Sunday afternoon, as it did on March 15.
But monetary policy has its limits. Even if the Fed goes beyond cutting interest rates and employs its biggest guns, it will not be able to fix the economic damage caused by the coronavirus without some fiscal stimulus of the type currently under consideration by Congress.
The Fed’s standard toolbox
The Fed has bigger tools at its disposal that it can use in crises like these, including quantitative easing (however, as I explain later, even quantitative easing may not be enough this time). But the Fed’s policy instrument of first resort is its control over short-term interest rates.
There are reasons that the Fed’s control over short-term interest rates may be of limited help going forward. The specific rate the Fed normally targets is called the…
