Other central banks may also change policy as soon as this week.
European Central Bank officials meet on Thursday with action virtually guaranteed, although economists are divided over whether it will cut rates or focus instead on programs aimed at keeping banks lending. Data released Monday suggested the euro-area may be headed for its first recession in seven years.
The Bank of England may also shift, although it is likely awaiting the government’s budget on Wednesday, which may allow fiscal and monetary policies to unite.
“Central banks have an important mission to avoid a sharp deterioration in financial conditions,” said Shigeto Nagai, chief Japan economist at Oxford Economics in Tokyo, who previously worked at the Bank of Japan. “Provision of abundant liquidity to financial markets and intervention in asset markets” will be most effective, he said.
The crash in the price of oil is the newest challenge to central banks. While it may support demand in countries such as China that import crude, it threatens to drag inflation down further and will hurt energy companies such as those which embraced the U.S. shale revolution. The last bust in that industry -- when prices went as low as $26 -- contributed to a manufacturing recession.
“Oil prices have fallen sharply, bringing about the question of whether this is a net positive or negative for the global economy,” said Chetan Ahya, chief economist at Morgan Stanley. “Given the current backdrop, we are viewing this as a net negative for the global economy.”
One challenge now is that the Fed and its counterparts are perhaps not as powerful as they once were, given the world is facing a health emergency rather than a traditional economic shock.
“The Fed has plenty of things it can do,” said Roberto Perli, a partner at Cornerstone Macro LLC and a former Fed economist. “The problem, in my view, is that most of these would either lower rates even more than they already are, or would do little to help households and businesses should the coronavirus lead to severe economic, as opposed to financial, disruptions.”
That’s why governments are also being urged to loosen fiscal policy and target it at economic weak spots such as cash-strapped companies. While more than $54 billion in budget support has already been pledged or is under consideration, it hasn’t proved enough to appease markets.
The Trump administration is now drafting measures including a temporary expansion of paid sick leave and possible help for companies facing disruption from the outbreak, according to three people familiar with the matter. German Chancellor Angela Merkel’s government will aid companies halting work, and invest an additional 12.4 billion euros ($14.1 billion) between 2021 and 2024.