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Despite Fed's Rescue Attempt, Dow Plunges Nearly 800 Points

NOEL KING, HOST:

At least nine people in this country have died from the coronavirus and at least 3,000 people worldwide. Now, amid that tragedy, the virus is also causing problems for the global and very globalized economy. Stock markets have been dropping dramatically. Investors do not like uncertainty. And there is a lot about this virus that we don't know yet. In an effort to counter this, the Federal Reserve yesterday cut the U.S. interest rate by half a percentage point. It's the first emergency cut of this magnitude since 2008. That was at the beginning of the financial crisis. Here's Fed Chair Jerome Powell talking yesterday.

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JEROME POWELL: So we saw a risk to the outlook for the economy and chose to act.

KING: Diane Swonk is the chief economist at the accounting firm Grant Thornton. And she advises the Federal Reserve. She's on the line now from Chicago. Good morning, Diane.

DIANE SWONK: Good morning.

KING: Did the Fed make the right decision yesterday?

SWONK: I think they made the right decision even knowing that rate cuts alone can't cure what ails us.

KING: Let's talk about what ails us because Jerome Powell did point this out yesterday. He recognized that a rate cut can only do so much. Let's listen to what he said.

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POWELL: We do recognize that a rate cut will not reduce the rate of infection. It won't fix a broken supply chain. We get that. We don't think we have all the answers.

KING: What exactly is ailing us? He talked about the rate of infection. Obviously only doctors can do something about that - right? - the medical community. It won't, he said, fix a broken supply chain. And that seems to be at the heart of this. Can you explain what's going on there?

SWONK: Sure. That's one aspect of what's going on. What we're seeing is, literally, things that can't get out of China at the moment are stopping production here in the United States. In Long Beach where a lot of imports come in, half the longshoremen are actually laid off because the port is a ghost town right now because the parts that are essential to build the things that we sell here, and actual goods coming in from China, are not making it here at this point in time, which is idling plants here in the U.S. and causing layoffs here.

The other important issue is all the cancellations of travel and now conventions that we're seeing. That's going to have ripple effects on communities that are really big - like Orlando, Las Vegas - that have these conventions where large people gather. Of course, we're seeing in other countries even sports stadiums are being closed down so that they don't spread the infection. You can't regain that sale later on. So rate cuts alone can't hit either side of this equation, what's going on in production plans or what's happening with consumer behavior. But once - if we can bridge this - once we get to the other side, those lower rates will help us get out of the hole that we've dug by having this stop in economic activity.

KING: But is there anything that we can do about the stop in economic activity? Or does this just have to run its course?

SWONK: No, there's a lot of things we can do. And Jay Powell made a plea, basically, for fiscal policy. It's really in the hands of Congress and our elected officials to try to find ways to bridge this gap. We need to, one, take care of the well-being of people. One of the biggest problems in starting up again and in weathering the virus itself is that so many people get sick. We need to make sure that people have expanded Medicaid in the states to have - make sure they can cover the costs of going into the hospital and being able to cover the costs of the illness. We also need to prevent the illness more. And we need to be able to help people who actually lose their jobs in firms.

In Italy, they're now going to be giving tax credits and helping companies so they don't go insolvent and make this morph into - you know, go bankrupt and have this morph into profit losses, layoffs, lost demand and a vicious cycle of an even deeper recession. You want to bridge the period in time where you have a stop in activity to be able to emerge the other side and pick up again. So governments have a role to play. But we really need our elected officials to take the lead on that. It's not something the Federal Reserve can do on its own.

KING: OK. President Trump, we should note, suggested on Twitter possibly a payroll tax cut. That's one other example of a stimulus. I want to ask, because you mentioned the R word, recession - we don't like asking economists to make predictions. But since you brought it up, are you predicting a recession?

SWONK: I am very worried we're going into a global recession. In the U.S. we'll, at minimum, see what we call a growth recession. What that means is that growth slows down so much that it can't hold the unemployment rate from rising slightly. That's the mild version. We don't want to see it actually contract and have a much more steep rise in unemployment. And the key is to sort of maintain those kind of conditions so we can bounce out of it and pick up more rapidly on the other side.

KING: I want to ask you a bit more about that Fed rate cut, because the big surprise was that it looked like markets were going to rebound if the rates were cut. Futures were pointing higher. And then that's not what happened. It was about 15 minutes after the announcement that the markets kind of plunged anyway. We have, now, more countries reporting more new cases. The WHO announced yesterday that eight additional countries reported cases of COVID-19. Did the Federal Reserve possibly act too soon yesterday?

SWONK: I don't think they acted too soon. I don't think you can act too soon when you have so few tools. You want to make sure you've got them in the system already working and ready to go when they can help because remember, on the margin, even the Fed can help stressed companies that have trouble getting access to credit, getting more access to credit at a difficult time. So that is important. It's not a solution. But it does, on the margin, help us as one step along what's going to be a very long road to travel. So I think that is important.

But I think the reality is it's - what we're seeing is even if it's not called a health pandemic, which is a bit semantics at this point in time, it's what I call an economic pandemic because it has spread globally. And it is affecting the global economy. And the U.S. is not an island unto itself. It is not immune to these effects. We've seen the cancellation in flights. We've seen the airlines get particularly hard hit and the reaction effect that's actually coming into the U.S. as well.

KING: Diane, in the seconds we have left, I want to ask you, do you think the White House is handling the response well when it comes to the economy?

SWONK: (Laughter) It leaves me a little speechless. I think we need a lot more active testing and more active well-being. Taking care of our people, at the end of the day, is what our government is meant to do. We need to take care of our well-being to weather the storm.

KING: Diane Swonk is an adviser to the Federal Reserve and the chief economist of Grant Thornton. Thank you, Diane.

SWONK: Thank you. Transcript provided by NPR, Copyright NPR.