U.S. Treasury Secretary Steven Mnuchin testifying Wednesday before a House Appropriations subcommittee on Capitol Hill.
Photo: michael reynolds/ShutterstockThe Federal Reserve’s half-point rate cut and market jitters are focusing attention on potential government measures to soften the economic impact of the coronavirus.
The House of Representatives voted Wednesday to approve roughly $8 billion in emergency spending to develop medical treatments and prevent new infections.
Beyond supporting that measure, the Trump administration has delivered mixed messages about whether it considers any additional government support as necessary to cushion the U.S. economy.
President Trump and White House officials have said they don’t see an immediate need to craft a broader fiscal-policy response because the economy has been faring well. While Mr. Trump has suggested Congress consider a payroll-tax cut, Treasury Secretary Steven Mnuchin has said the idea isn’t under consideration.
Mr. Mnuchin said Tuesday the administration was prepared to ask Congress for more help in response to the virus if necessary and the Treasury was considering targeted actions to help small and medium-size businesses as well as workers who don’t have paid sick leave.
“All the central banks and finance ministers are very focused on what we can do together and independently to help weather the economic impact of this in the short term,” Mr. Mnuchin said Tuesday after a conference call with officials from the Group of Seven industrial economies.
Fed officials and economists have warned that governments can’t rely solely on lower rates to ease disruptions from a public-health emergency. The administration may need to step up its response, given the unusual nature of the threat and the limits of monetary stimulus when interest rates are historically low, economists say.
“My sense is that they’ve been flat-footed and too slow, and I don’t think they’re communicating today the degree of urgency that I personally feel about getting these initiatives designed and ready for legislation,” said David Wilcox, a nonresident senior fellow at the Peterson Institute for International Economics and a former Fed economist.
The Fed’s Tuesday rate reduction brought its benchmark rate to a range between 1% and 1.25%. Because the central bank is reluctant to push rates below zero, it has limited room to cut rates further.
Moreover, the drop in the benchmark 10-year Treasury yield to record lows illustrates why it will be more difficult for the Fed to rely on the stimulus tools it used following the 2008 crisis.
Back then, officials issued guidance about plans to keep rates low and purchased trillions of dollars of Treasury and mortgage debt in an effort to reduce long-term bond yields. But with the 10-year yield falling to 1%, there is less scope to move them lower.
“The Fed is only a few bad data reports away from being at the end of the line,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said in a report Wednesday.
The government may need to help households and firms affected by school and work closures and changes in broader public psychology that lead to declining incomes and revenues.
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A pandemic comparable to the 1918-20 flu could cause significant short-term disruptions for some industries, according to a 2005 report by the Congressional Budget Office. It estimated demand could fall by 80% for three months for industries such as entertainment and lodging and 67% for transportation and warehousing. That pandemic a century ago is estimated to have killed at least 17 million people world-wide.
If the new coronavirus leads to temporary disruptions concentrated by region or industry, policy makers could consider measures to limit financial distress to households and firms.
In the short run, health agencies can shore up confidence by ensuring easy access to testing and by educating the public about how to prevent the spread of the virus, said Julia Coronado, a former Fed economist who runs an economic consulting firm in New York.
Just as the government provides housing assistance after natural disasters through the Federal Emergency Management Agency, it could offer temporary benefits similar to unemployment insurance to quarantined workers who lose income, said Claudia Sahm, a former Fed economist who is now director of macroeconomic policy at the Washington Center for Equitable Growth, a left-leaning think tank.
The goal should be to ensure that financially fragile households don’t pull back on spending because of health emergencies. “If it looks like this virus, which appears to be temporary, is going to take down small businesses, get them loans,” Ms. Sahm said. “If you get sick, you should get a check.”
For vulnerable workers who don’t get sick leave, policy makers could create a program that allows businesses to apply for funds to keep paying employees who can’t come to work, economists said.
Jay Shambaugh, director of the Hamilton Project, a left-leaning think tank, said lawmakers could also consider waiving requirements for unemployed workers to search for work, and to maintain benefits in areas with localized outbreaks. And they may need to boost monthly food benefits for families whose children lose access to free- and reduced-price meals when schools are closed.
If growth slows markedly or unemployment rises quickly, a large spending bill or stimulus payments to all Americans—steps undertaken during the 2008 financial crisis—may be warranted, some economists said.
Mr. Shambaugh and others have called on Congress to vote now to authorize stimulus checks, which would only be sent in case of a sharp, fast rise in the jobless rate.
In Hong Kong, which entered a recession last year, the government will give every adult permanent resident $1,284 in cash. Italian officials said Sunday the government would consider a tax credit for companies that report a 25% drop in revenue.
Regulators could also encourage banks to keep lending in hard-hit communities and work with borrowers that fall behind on payments, economists said.
Write to Kate Davidson at kate.davidson@wsj.com and Nick Timiraos at nick.timiraos@wsj.com
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