COVID-19: A Crisis the Fed Can’t Fix

Y2K Redux

Supply Chains Unlinked

Fed Futility

Some Silver Linings

How to Find the Opportunity I See Everywhere

For the last 3+ years, I have maintained it would take an “exogenous” event to send the United States into recession. Historically suboptimal growth? Sure, but sub-3% growth isn’t a recession.

The coronavirus obviously qualifies as an exogenous event. But that doesn’t mean a textbook two-quarter recession, although it certainly may. Financial markets aren’t waiting to find out what COVID-19 will do. Much of the selling is fear of the unknown. The modern world hasn’t faced anything quite like this, and it’s coming at a time when the economy is vulnerable for other reasons.

We actually face two concurrent crises. One is about public health, the other about the economy and markets. They won’t necessarily track each other. We might find the virus is less deadly and infectious than feared but that the fear itself (plus the control and containment measures) harms the economy.

After talking to economists and medical researchers this week, I am pretty confident in two things.

First, this is going to be a long slog. The virus will spread slowly but widely. The containment measures are simply buying time. There’s no need to panic, but we should all take common-sense protective measures.

Second, as usual, I am the “Muddle Through guy.” I think we’ll get through this. Not without some damage and tragic loss of life, but it won’t be the end of the world. This is not the zombie virus. I wasn’t thinking of viruses when I said the 2020s would be the Decade of Disruption, but COVID-19 may mark the beginning of it.

Here’s the worst part: The Federal Reserve and other central banks can’t bail us out this time. Their tools aren’t designed for this kind of problem. Powell, Lagarde, Kuroda, and others are all making their ritual pledges to “stand ready” with support. They may even be serious. But they have little to offer. Rate cuts are not vaccines.

We may soon, after a dozen years in monetary policy training wheels, find out if we can still ride a bike.