Except in one crucial sense: The coronavirus, and the global economic downturn it seems to be triggering, shows the wisdom of those analysts who have repeatedly warned that giant deficits deprive the United States of “fiscal space” with which to respond to a sudden, unforeseen crisis. With federal fiscal policy already expansionary, the obvious alternative at hand is monetary policy; yet there is only so much that can be accomplished by interest-rate cuts, as the volatile response on financial markets to the Federal Reserve’s half-point reduction in rates Tuesday suggests. The central bank’s stroke was bold, but, for all that, managed to signal alarm as well as resolve. Markets understand that the coronavirus disrupts not only demand but also supply by making it harder for companies to produce and move products to markets — whereas interest rate cuts largely work by goosing demand.
On balance, though, it was probably the right call. The Fed and its fellow central banks could not stand by idly when there was anything they could do to prevent the inevitable shock to global growth — now estimated at half a percentage point by the Organization for Economic Cooperation and Development — from getting worse. This is true even though Mr. Trump loudly demanded the Fed rate cut before it occurred. That sequence of events may create the impression of a Fed that acts on his instructions, rather than independently, as it should and, we are confident, still does. Fed Chair Jerome H. Powell, as he has before, must hope that his own steady demeanor and the policy arguments he offers cancel out the pernicious appearances the president recklessly generates. With the federal government’s cost of borrowing now below 1 percent a year for 10-year obligations — the lowest rate ever — there is also a case to be made for at least some extra federal borrowing to help weather the crisis, preferably targeted at defraying the direct costs, both to patients and to the medical system, of coping with the pandemic.
Congress will need time to craft any such response. There is one thing it can do to shore up economic confidence in the short run, however: deny confirmation to Mr. Trump’s poorly qualified nominee to the Fed’s board, Judy Shelton. Her fate is up to the Republican-controlled Senate Banking Committee, where, unfortunately, key members may be wavering. Sen. Patrick J. Toomey (R-Pa.) has just dropped his objections; Sen. Richard C. Shelby (R-Ala.) has said he would vote yes if all other GOP members did. That leaves the matter up to a handful of uncommitted Republicans such as Sens. John Neely Kennedy (La.) and Martha McSally (Ariz.). This crisis is a reminder that central bank competence and independence are vital national resources; these senators must behave accordingly.
Read more: