March 9, 2020 at 11:48 AM EDT
With global economy in balance, the White House and Fed are at odds over how to help
As he concluded meetings in Saudi Arabia on Feb. 23, Federal Reserve Chair Jerome H. Powell sent urgent emails to his staff about the coronavirus. The outbreak was escalating in South Korea, Italy and Iran, and the central bank needed to intensify its response to the economic shock.
While Fed economists began to run through scenarios of what could go wrong, senior White House officials both privately and publicly maintained that there was virtually no reason for concern. On Feb. 25, as Powell began meeting with staff to prepare contingency plans, White House economic adviser Larry Kudlow said the United States had an almost “airtight” containment on the outbreak, a day after urging investors to “buy these dips" in the stock market.
The coronavirus is threatening the economy, with supply chains stalling, tourism falling sharply and the oil markets plunging 30 percent on Sunday night. Yet U.S. economic leaders are divided about how to respond, with Powell and his Trump administration counterparts, Kudlow and Treasury Secretary Steven Mnuchin, differing in their assessments of the risks as well as the policies best suited to address the economic threat.
Not only do the Fed and White House appear to disagree on the severity of the potential economic hit, they’re at odds about the power of interest rate cuts to stem the panic. Trump and Kudlow have emphasized the Fed’s power to cut interest rates as the primary economic response to the crisis. But although they have moved to cut rates, Powell and others at the Fed have suggested that they have only a limited role to play, with some Fed officials arguing that spending or tax stimulus from Congress and the president would have a greater effect.
By Heather Long and Jeff Stein