By Daniel Moss
FOR CENTRAL bankers around the world, acting locally now means thinking about China.
The spread of the coronavirus will likely hit mainland growth hard enough to warrant a global monetary-policy response. That means cuts in interest rates to follow last year’s easing steps. To do otherwise would be tantamount to denying the enormous role China plays in international commerce relative to 2003, the last time an epidemic dented the country’s expansion. At that point, global growth barely missed a beat. This time, it will suffer, and quickly. Central banks moved decisively as the trade war unfolded and global sentiment soured; discarding such a useful template would be a waste.
It makes sense that neighborhood cops would be the first-line of defense. The People’s Bank of China flooded the financial system with liquidity and pushed rates down within minutes of markets reopening Monday after an extended break. The Reserve Bank of Australia said Tuesday that the virus is having a “significant effect” on the country’s biggest trading partner. Though it kept rates on hold, many expect at least one cut is likely in coming months. The Philippines, which sets borrowing costs Thursday, is expected to trim. In India, the virus could be another factor that pressures the central bank to resume cuts, after aggressive reductions in 2019.
While all this is encouraging, policy action in Asia is necessary but insufficient. For a true global response, the Federal Reserve needs to come off the sidelines. This isn’t such a leap, despite the central bank’s preference to hold its benchmark rate after three cuts last year. Officials made clear since December that, in the event rates are nudged around, any move is more likely to be down than up. Stubbornly low inflation was troublesome well before the world’s attention turned to Wuhan.
Bond investors are starting to place bets on a Fed rescue. They are right to do so. In each of the three central-bank statements that announced cuts last year, the world’s challenges came first, inflation second: “In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the committee decided to lower the target range for the federal funds rate to…” Last Friday, Vice-Chairman Richard Clarida called the virus a “wild card.”
Should the Fed wish to take out some insurance against a Wuhan-driven, worst-case scenario, it’s already laid the groundwork. Policymakers’ shift in tone and language shows how far we’ve come from the days when the world’s most powerful monetary agency barely looked beyond America’s shores. In more than 700 pages of transcripts from the Federal Open Market Committee meetings from the first half of 2003, SARS was mentioned 33 times and China, 19. That compares with 123 for Japan, which was in its second decade of economic funk. The Fed made its sole cut that year in June.
Whatever the Fed’s response, it won’t change the fact that China now accounts for 40% of growth in global gross domestic product. Beijing policymakers responded a lot more quickly than their American counterparts as the mainland economy began cooling in 2018, which was only exacerbated by the trade war. When the Fed eventually cut rates last July, that merely gave Asia’s regional central banks cover to continue on their path: Chairman Jerome Powell was an accelerator, not a catalyst.
That the US wasn’t the first mover is a historic shift. The dollar’s dominant role in finance means the Fed will remain the world’s most important central bank, but it’s no longer the only driver.
Now, everyone has a stake in China’s prosperity and its misfortune. Central bankers showed they understood that in 2019. They would be well-served to remember this lesson.