In response to the coronavirus spooking investors and shutting down large swaths of the economy, the Federal Reserve announced another round of emergency rate cut on Sunday to try to stem the flood of economic damage.
CNBC reported, “The Federal Reserve, saying ‘the coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,’ cut interest rates to essentially zero on Sunday and launched a massive $700 billion quantitative easing program to shelter the economy from the effects of the virus.
The new fed funds rate, used as a benchmark both for short-term lending for financial institutions and as a peg to many consumer rates, will now be targeted at 0% to 0.25% down from a previous target range of 1% to 1.25%.
Facing highly disrupted financial markets, the Fed also slashed the rate of emergency lending at the discount window for banks by 125 basis points to 0.25%, and lengthened the term of loans to 90 days.”
Unless the Federal Reserve has a laboratory in their basement to develop a vaccine for the coronavirus, this was a worthless rate cut, and stock market investors agree.
All the major stock indexes opened down and, as of this writing, the Dow Jones Industrial is down 2,000 points. Investors realize that the Feds’ actions don’t match the economic reality on the ground.
Unlike the subsequent fallout from the 2007-2009 financial crisis—which was caused by systemic issues in the mortgage and banking industry—this economic crisis has been caused by an outside force: a pandemic. The coronavirus can’t be cured by lowering interest rates and repurchasing one trillion dollars of treasury bonds and mortgage-backed securities.
It doesn’t matter how low the interest rates are or how much money is spent because that money can’t be spent on goods and services. Cruises, air travel, and other similar industries are suffering because they have been forced to curtail business operations due to a virus, not a systemic issue related to loans and market reallocation.
Markets are too reliant on the actions of central banks throughout the world. Whenever there are any market upheavals, it is expected that central banks can fire up the magical printing press and save the world from an economic Armageddon
Instead of our national motto of “In God We Trust,” investors live by the motto “In the Fed we trust.” These demigods sit at a conference table in Washington D.C. and are arrogant enough to believe that they can engineer the perfect economy. However, history has shown us that they can get it wrong.
During the early days of the Great Depression, the Federal Reserve shut down the credit spigot and raised rates drastically, which exacerbated the Depression and helped lead to a ten- year economic calamity.
The Fed was supposed to help end financial crises. However, data shows that financial crises have been more frequent in the years following the establishment of the Fed in 1913 then in the preceding century before.
The Fed kept interest rates too low for too long in the run-up to the 2007-2009 financial crisis and failed to address the housing crisis before the bubble exploded.
The latest rate cut by the Federal Reserve is just another in a long line of Fed foibles.
Hopefully the economic crisis—as well as the virus itself—will pass without doing any irreparable damage.