Magazine April 20, 2020, Issue

The Fed and the Virus

(Kseniya Ovchinnikova/Getty Images)
It can best help the economy by preparing for recovery

In the days when the coronavirus was just beginning to dominate the news, analyses of its economic impact emphasized that its spread counted as a “supply shock.” The economic effect of disruptions to supply chains would be similar to that of the 1970s oil embargo. A sudden drop in productivity would reduce our economy’s output of goods.

It followed that the Federal Reserve would be nearly powerless to undo the damage. The Fed typically combats recessions by acting on the “demand” side of the economy. By reducing interest rates, it can, for example, lead more people to buy houses, and their

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