Don’t look to the Federal Reserve to be the superhero to combat the Coronavirus, says former Federal Reserve Chairman Alan Greenspan.
On March 6th Alan Greenspan will be celebrating his 94th birthday. We wish him continued health and happiness. Dr. Greenspan is Advisors Capital Management’s senior economic advisor and no stranger to Federal Reserve stimulus through rate cuts. In 1987 after the October crash that reduced the Dow by over 22%, Dr. Greenspan cut the Fed funds rate by 50 bps.
We thought it would be appropriate to get his thoughts regarding the current Coronavirus actions taken by the Federal Reserve. The following excerpts are part of a 12-page report created by Advisors Capital entitled An Investor’s Guide To Coronavirus. Click here for the complete report.
1) Given the global reaction to the Coronavirus, what tools does the Federal Reserve have that could re-stimulate growth, should they decide to do so?
Greenspan: “The Fed essentially has one tool, the balance sheet. There’s a lot of verbiage that sounds exotic but it all comes down to what we know. FOMC actions have not fundamentally changed since 1914.”
2) Might global central banks coordinate to provide a fiscal stimulus?
Dr. Greenspan: “We always act in a coordinated way. You just don’t see it. I always worked with my counterparts at other central banks. We just didn’t communicate it. It’s nonsense to think otherwise. We are in contact all the time.
3) The Fed just cut by 50 basis points. Is that to mitigate the effects of the virus or reinforce the recovery later?
Dr. Greenspan: “When the Fed moves, a huge number of things go on. There is nothing unusual in the 50 basis point cut. Ideally, the Fed wants to alter its balance sheet and is responding to the fact that the economy is softening.”
4) Is it possible for the Fed to model out an epidemic?
Dr. Greenspan: “The Fed cannot adjust to a virus. Just the effects of the virus. And so new models are being constructed all the time. The death rate from the 1918 flu was ultimately more than that of WW1. That could not have been known ahead of time. The Fed never thinks about natural disasters. The Fed is always forced to build models around various changes in the world.”
5) Is monetary policy even an effective tool when fighting a virus?
Dr. Greenspan: “The economics are very simple. The mechanism of the world economy may be shut down. You tell me the GDP rate and I’ll tell you the fed funds rate.”
6) Have you ever had an experience similar to this?
Dr. Greenspan: “I don’t recall having to do this for medical consequences ever. However, there have been many similar impacts on the economy. What we don’t know is will this peter out like other flu epidemics or is this something new. Yellow fever caused a huge loss of life in early America. It wasn’t until they recognized it was transmitted by a mosquito and Philadelphia had to evacuate a significant part of the population. I don’t expect that, but this is worrisome.”
7) Do you think China overreacted?
Dr. Greenspan: “I don’t think so. This is an unusual event. There is no evidence this is phasing out quickly. Its apparent China is coming to a halt. It’s extraordinary given how they have grown. It’s a devastating blow to Asia. Immediate rebound might be the right forecast but we are looking at figures daily to make that determination.”
8) Can the Fed be the superhero investors and pundits so often clamor for?
Dr. Greenspan: “I don’t think so.”