Narayana Kocherlakota, the former head of the Minneapolis Fed, makes that case today, and I agree with it. The Fed cannot prevent all the harms that a coronavirus epidemic could do to the economy. Supply-chain disruptions will cause output to be lower and prices to be higher than they otherwise would. The Fed can’t offset that supply-side hit. But it can and should keep some other potential effects in check. Lower growth prospects should translate to a lower neutral (or “natural,” or “equilibrium”) interest rate. If the Fed doesn’t move interest rates down to match, it would be making monetary policy effectively tighter. The demand for money balances might increase, too, if concern over the coronavirus (and over Fed policy) becomes a panic. The Fed should accommodate that demand through looser money.


Market expectations of future federal-funds rates have moved sharply downward over the last month, and that trend is continuing. One way of interpreting that shift is that money is inappropriately tight right now. The balance of risks, especially with inflation so low, counsels in favor of preemptive action.