In the United States, to combat the coronavirus, the interest rate was urgently reduced for the first time since the 2008 crisis. That's it, the new crisis is now official?

On March 3, the board of governors of the US Federal Reserve System (FRS, an analogue of the Russian Central Bank) met for an emergency meeting to discuss the danger of the coronavirus epidemic for the American economy. Although only 103 cases of infection were recorded in the United States at that time (a significant part were visitors and evacuees from the Diamond Princess cruise ship) and six deaths, Fed managers decided to act immediately. They unanimously approved a rate reduction of 0.5 percentage points. So they tried to overcome fear, which is spreading through the global economy faster than the virus through the human population.

Rate cuts are a standard measure to support business activity when it shows signs of cooling. When the Central Bank sees the economy overheating, it, on the contrary, raises rates. The mechanism looks simple: the price of money depends on the rate; The lower the rate, the cheaper commercial banks can borrow money from the Reserve Banks (part of the Federal Reserve). They, in turn, can provide cheaper loans to the economy and population. The Fed's announcements accompanying rate changes also have a serious impact on business activity; they allow businesses and ordinary people to make financial plans for the future.

An emergency rate cut of 0.5 percentage points at once looks unusual. In recent years, the rate has changed by 0.25 percentage points - and as planned. The last time the Fed changed rates so sharply was in 2008, when the US financial crisis began, which ended in a global recession - the deepest since the Great Depression of the 1930s.

The Fed in its statement clarified that the decision has nothing to do with the current state of the American economy - it is very strong , unemployment is at the lowest level in half a century with low inflation, production is growing, etc. Even the fall in American stock markets (obviously associated with fear of an epidemic) - again the strongest since the 2008 crisis - does not mean that the economy will soon be in crisis. Fed policymakers typically rely on such data when making rate decisions. However, this time, as Fed Chairman Jerome Powell says, they looked at epidemiological reports. The rate was reduced only because of the epidemic and its possible consequences.

The further spread of the epidemic could cause a heavy blow to the economies of the United States and other countries.

First of all, the epidemic can lead (and has already led in China, South Korea and Italy) to a drop in demand - especially in the transport and tourism industries, as well as in the entertainment and trade sectors. Production chains linked to China suffered (there, due to the epidemic, the New Year holidays were extended and enterprises were stopped, including those that produce goods and materials for foreigners). In addition, China's healthcare has experienced enormous strain, requiring emergency expenditures. True, for the United States and most countries that have not been affected by the epidemic, these direct losses are not yet very important. Even those companies that have production or suppliers in China did not suffer catastrophic losses.

But the epidemic in any case reduces business and consumer confidence. Businesses stop investing, fearing future losses from the spread of the virus and - importantly - measures to combat it, such as quarantine and cancellation of flights, and consumers postpone expensive purchases, which again affects the desire of businesses to spend. It is the uncertainty and rising risks that have likely caused panic on stock exchanges, leading to shares falling in recent weeks.

Fed Chairman Jerome Powell admitted that the Central Bank cannot fight the destruction of production chains, quarantine closures of enterprises and queues in hospitals. But it can maintain confidence and overcome fear of business and the population. Investments will be maintained if investors understand that the increased risk will be covered by the increased profit; a business will get it if it can borrow dollars cheaper. Finally, confidence will be supported by the Fed’s position itself, which shows that it is ready to support the economy by any means necessary.

Central banks of other developed countries are discussing similar measures. Immediately after the news of the Fed's decision, markets rose 1%.

If scientists and governments can quickly (within the coming weeks) stop the rapid spread of the virus, the current rate cut should be enough to stop the panic. But if the epidemic continues to spread, central banks may lack the usual tools to continue the fight. In 2008, when the crisis began, the Fed began cutting rates from 5% and did so many times; after the reduction on March 3, 2020, the rate is 1.25%, and it will be difficult to reduce it many times.

In 2008, when rates in many countries were almost zero, and the crisis caused by the massive refusal to pay debts worth many trillions of dollars showed no signs of abating, central banks had to take emergency measures. They simply flooded their countries' economies with money through "quantitative easing" . For a crisis caused not by debt, but by an epidemic, such tools may not be suitable . Jerome Powell declined to tell reporters directly what measures the Fed would use if the situation continues to deteriorate.

Dmitry Kuznets