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The Bank of Canada and the U.S. Federal Reserve are giving markets what they usually crave – lower interest rates. So why are stock markets plunging?

It’s all a matter of context. With rates already so low, the emergency cuts unveiled in recent days are unlikely to act as a powerful new stimulant for the economy. Instead, they function more like a flashing red light. They signal the high alarm with which policy makers view the deteriorating state of the global economy.

Look, for instance, at the package of policies unveiled by the Federal Reserve on Sunday evening – a jumbo-sized rate cut, as well as massive new asset purchases, loan agreements with other central banks, and so on. The package resembles a greatest-hits album of the Fed’s actions during the Great Financial Crisis of 2008 and 2009.

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Given the breakneck speed with which it has moved to crisis-era tactics over the past two weeks, the U.S. central bank is implying it views the current situation as a threat of similar magnitude.

That is unsettling. So is the question of what comes next.

With its key policy rate now at zero, the Fed has used up its conventional rate-cutting ammunition. The world’s most powerful central bank can still deploy plenty of unconventional measures to ensure the system doesn’t seize up, but its single most reliable tool to stimulate the economy no longer functions when the federal funds rate is zero.

The Bank of Canada is in only slightly better position. After its own emergency cut last Friday, it still has three quarters of a percentage point to go before it hits zero. Considering that central banks usually cut rates by a full five percentage points to buffer against a recession, that is hardly any room at all.

So it’s over to legislators. They can open the spending spigots to help cushion the economy during this rocky patch. To Ottawa’s credit, it has already announced $1.1-billion in coronavirus-related spending and it pledged on Friday to unveil even more stimulus in coming days. This is welcome news.

But it’s not clear if it will be enough to ensure a speedy recovery from this downturn. The core problem facing policy makers is that the novel coronavirus doesn’t pay attention to either interest rates or government spending. So long as the virus keeps spreading, forcing large swathes of the economy to close or gear down, neither monetary policy nor fiscal policy can do more than stick a bandage on the real problem.

Rock-bottom interest rates can’t fix a manufacturer’s broken supply chains or coax more goods out of quarantined factories. Nor can they create crowds at restaurants that are shuttered, or persuade buyers to load up on supermarket goods if shelves are empty.

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Fiscal policy of the standard variety also has its limitations. Most public-works projects take a long time to move from votes in Parliament to shovels in the ground. Plans to help hard-hit industries take time to unroll, too. Even worse, the choice of whom to help is highly political. Finally, there are practical issues to consider. How can government help restaurants, bars and hotels if they are closed? How can it help airlines if no one wants to fly?

There is no perfect solution. What policy makers should focus on is, first, containing the virus by any means necessary – even if that means enforcing widespread quarantines – and, second, helping businesses and people get through the next few months.

Larry Summers, the Harvard professor and former U.S. treasury secretary, put it well a few days ago when he said the issue is that economic time has stopped, but financial time hasn’t. As business activity slows, or freezes, people still have to pay their credit cards and mortgages, make rent, fill the gas tank.

One idea is for Ottawa to send cheques to every household. This may appall fiscal hard-liners, but it is hard to conceive of a simpler, more effective or more immediate way to bridge the gap between a stalled economy and people’s continuing need to service debts and buy essentials.

There are many other fine ideas, too – grants to afflicted industries, immediate financial help to laid-off workers, pushing lenders to exercise forbearance on loans, and so on. Most involve spending money. However, with interest rates at historic lows, Ottawa is in a good position to do just that. And it’s far better than the alternative – emerging from the pandemic with a shattered economy and bankrupt consumers.

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