US Fed rate cut alone won’t steady a global economy shaken by the coronavirus

The dramatic spike in demand for safe-haven 10-year Treasuries, raising the spectre of an inverted yield curve, is a sign that markets expect more from the Fed

The central bank must ensure access to US dollar liquidity remains open, at a time spooked consumers stockpile certain goods and banks stockpile US dollars

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Liquidity matters – it is access to money, and to a large extent that means access to US dollar liquidity, that keeps the global financial system functioning smoothly. Photo: Xinhua

Published: 8:00pm, 10 Mar 2020Updated: 10:25pm, 10 Mar 2020

Last week, the Federal Reserve cut US interest rates. The spread of the coronavirus has brought “new challenges and risks”, Fed chair Jerome Powell said in the press conference that followed. The Hong Kong Monetary Authority followed suit. But cutting interest rates may not be enough.

Access to liquidity, the availability of money, matters just as much as the price of money in times of crisis.

As it stands, the Fed has announced a 0.5 percentage point “reduction in the target range for the federal funds rate, bringing that range to 1 to 1.25 per cent”. Markets aren’t satisfied, pricing in further coronavirus-related US interest rate cuts in spite of Friday’s buoyant US employment data.

Admittedly, as Powell pointed out, a rate cut will not reduce the rate of infection, or fix a broken supply chain, but it will “support accommodative financial conditions and avoid a tightening of financial conditions which can weigh on activity, and it will help boost household and business confidence”.

In any crisis, risk aversion drives money into liquid assets that are perceived to be safe havens, such as US government bonds, and more particularly into longer-dated paper to lock in the term premium. That premium reflects the extra return investors generally expect to receive for lending for longer periods rather than shorter-dated maturities.

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