The two of ways to combat the impact of the coronavirus are government spending and rate cuts from the FED. Government spending injects money into the circular flow to help give it a jump, while rate cuts attempt to increase investment spending, which in turn, helps the circular flow.
When it comes to the present situation with the coronavirus, rate cuts by the FED will be less useful when compared to government spending, and we can see this through the response to both in the stock market. When the FED initially cut rates, stocks continued to drop by a large margin of points, and the U.S. stock market saw some historic losses that are firsts in our history. The reason markets did not improve is because expansionary monetary policy through rate cuts are ineffective against uncertainty. The virus has a lot of uncertainty attached to it, with the lethality of it, how long it will last, etc. Rate cuts are unable to calm down this uncertainty, mainly because a virus is not an economic agent. If it were, then the action taken by the FED may be more effective than it has been.
That leaves us with government spending. Over the last week there has been talk and passage of a stimulus bill that is intended to inject money back into the circular flow in order to help the losses everyone has been experiencing due to the virus. The big question is: Will this policy help the current situation our economy is in? And right now, it is too early to tell. Theory explains that it could help our present state and help bring life back to the economy, but there are so many moving parts that it is hard to tell. The only evidence that I can turn to is the fact that stocks went up when the bill was proposed, which shows optimism towards what it could bring to the U.S. economy.
I would like to point out real quick that the response in the stock market does not indicate a causal relationship, however, improved sentiment from the economy is good for calming down consumers and investors, which in turn could help improve the status of the economy in the United States.
To close, government stimulus seems to be a more optimal strategy to combat the coronavirus’s impact on the economy. Through the circular flow, we can show the expected impact the stimulus package could have on our present economic state. We can also show through changes in the stock market that the FED rate cuts have been relatively ineffective with combatting the changes due to the virus. What we all need to remember is that every single person in entire economy is connected to each other in one way or another. We must all do our part to get the economy on track before more damage is done.