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The Fed cuts, will it help?

March 17, 2020 © Copyright Glomacs

On March 15, 2020, in a major emergency response to the COVID-19 outbreak, the Federal Reserve lowered its interest rate target to a range of 0% to 0.25%. This second rate cut in less than two weeks was a full percentage point, twice as big as the first.

Cutting interest rates always helps push stocks upward. However, this fact should be evaluated against the fact that we’re going into recession.

Several industries are now shutting down for probably several months, and it’s hard to believe the shocks won’t last at least six months, even after we get control over the virus.

Cutting the interest rates might help a little, but there’s only so much that can be done.

“The market is like a two-month-old child. Every time it cries, it wants to be picked up, sometimes you’ve got to leave the baby in the crib.”

It will have a positive effect in the short run. The problem will hit when a recession hits, and the Fed has no room left to maneuver. Cutting interest rates makes money easier to get, but eventually, the source dries up, and the Fed has to step in and reduce interest rates.

This easy money will briefly pull the markets up; but begs the question— what to do when the economy slows, not if it will slow.

Can the Fed fix this problem?

Today’s problem is a sudden stop in production, which monetary policy can do little to offset.

Fed can’t reopen factories shuttered by quarantine. Monetary policies will not get shoppers back to the malls or travelers back onto airplanes, insofar as the center of their concern is focused on safety and not cost.

Inflation, already subdued, is headed downward and a rate cut will not hurt; but not much real economic stimulus should be expected of these knee jerk interventions.

The intertwining of previously separate capital markets and money markets has produced a system with new dynamics as well as new vulnerabilities. The financial crisis reveals those vulnerabilities for all to see.

 

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