The coronavirus has substantially increased the risk of a recession, said Harvard University economist Megan Greene at the Pensions & Investments' Defined Contribution East Coast Conference in Orlando, Fla.
If the global supply shortage caused by the COVID-19 virus leads to companies going out of business, it could lead to a "demand shock," exacerbating the financial turmoil roiling the markets, she said.
Already there are indications that the "supply shock" is turning into a global demand shock, according to Ms. Greene. One is that inflation expectations have dropped sharply over the past month.
Ms. Greene noted that the Federal Reserve and central banks worldwide are limited in what they can do to address the crisis. "Rate cuts aren't that effective in the face of this kind of shock," she said. "No one has that much room to cut rates."
Fiscal policy, rather than monetary policy, can play a much bigger role, but the challenge is that "politicians have to agree on what measures to implement," she said.
Any fiscal stimulus will need to be carefully tailored to make sure it goes to businesses that need credit and individuals who are losing their jobs, Ms. Greene said.
The heightened risk of recession, however, doesn't mean retirement savers "need to liquidate and get out of the market," she said. Instead they need to "invest defensively" in things like utilities and health care.
