The Federal Reserve created a surprise this week by, quite unusually, going for an inter-meeting cut of the federal funds rate of 50 basis points. At first glance, the very nature of an epidemic makes monetary policy ill-equipped to address the consequences. The drop in demand and the disruption of supply are not related to the level of interest rates. Nevertheless, monetary policy has an important role to play in the current environment by seeking to avoid a deterioration of the financial and monetary conditions. This is a defensive move, the alternative being to run the risk that the tightening of these conditions acts as an additional brake on activity. It seems this has played a role in the decision of the FOMC and it now puts the onus on the ECB to act at its meeting next week.
At the start of a new month, the purchasing managers indices are amongst the earliest data providing information on what happened the month before. Following the coronavirus outbreak they were even more eagerly awaited than normal. For the manufacturing sector, the picture is very mixed, with a considerable decline for the world index on the back of huge drops in China and Hong Kong. On the other hand, the index for the eurozone saw another increase, driven by Germany, the Netherlands, Spain and Greece with Italy remaining stable and France weakening. In the US, both the Markit PMI and the ISM index declined. Clearly, except for China and Hong Kong, the data do not yet show the impact of the coronavirus epidemic but it is only a matter of time for this to happen
