Lower interest rates will not stop the coming recession

With the outbreak of COVID-19 (coronavirus), many economists – including a former Fed president – have called for lower interest rates to head off any recession.

Former Minneapolis Fed President Narayana Kocherlakota argues that the Fed should not wait even until the March meeting to cut interest rates of possibly 50 basis points (.5%).

“The virus could result in a significant worldwide economic slowdown” and a rate cut is “a cheap insurance policy for the economy that the Fed shouldn’t pass up,” he said.

Recent global developments, including the more rapid spread of the coronavirus outside of China, make it more likely the Federal Reserve will act soon to cut interest rates to address growth concerns, according to economists gathered for a top policy conference on Monday.

“I think they’re going to have to go,” said Carl Tannenbaum, chief economist at Northern Trust. “Sitting still would be seen as being tone-deaf.”

The solution is not to reduce interest rates, which are already at rock bottom.  The problem is broken supply chains.  Manufacturers cannot get the components needed for their final products with the hundreds of factories closed in China and South Korea.

Lowering interest rates still further will not solve the problem of broken supply chains. However, lower interest rates may feed Wall Street.