A shock to stocks.
That's what the Federal Reserve delivered on Tuesday when it cut its benchmark interest rate by 50 basis points in an attempt to stem economic damage tied to the global coronavirus outbreak. The move sent stocks plummeting to session lows and drove the U.S. 10-year Treasury yield below 1%, a record low.
Market commentators, including CNBC's Jim Cramer, were split on whether the cut would be as effective as the Fed may have hoped.
Here's what five of them were saying on Tuesday leading up to and following the cut:
Fed cut rates. Now what?
Cramer, host of "Mad Money," was still waiting to see how bad the U.S. outbreak would get:
"We know mortgage rates are actually still above where they were when the 10-year was at 2[%]. OK? We also know that the problem is, if you got something that allowed you to get out of the hospital, we had a vaccine, anything, then you won't need this rate cut. But the more important thing is that we need people to be able to stay at work. There's a lot of people who can work at home. But there's another group of people – if they work at home, it's deadly. I want to see what the claims are."
Powell's paradox
Former Federal Reserve Governor Randy Kroszner expressed sympathy for the central bank's position:
"This is the paradox of central bank policy. If you move proactively and prevent something from happening down the line, people will say, 'Well, why did you do that? You may have caused panic and made it worse.' But if you did nothing and something goes wrong, then people say, 'Well, you saw it coming, why didn't you do anything?' And so that's actually where [Fed Chairman] Jay Powell's words become so important of how he describes what he's doing. … The research suggests and history suggests that trying to be proactive when you see something coming is valuable rather than waiting until after it comes and trying to pick up the pieces. But you also want to do it in a way that doesn't cause panic. And so, I think if he just talks about that the fundamentals of the economy are solid, we're facing particular shock in the U.S. and globally, we want to provide that support and we want to make sure to sustain recovery, that's what we're trying to do, hopefully, people will believe that and that will reduce volatility. But my guess is that there's just so much uncertainty that it's going to be really difficult for him to get that just right, but Jay is, I think, pretty good on that."
Coronavirus cut in vain?
Binky Chadha, chief global strategist at Deutsche Bank, wasn't convinced the move would help U.S. markets:
"I'm skeptical this is going to do very much. If the idea was basically to provide a circuit breaker for the markets, it should have come on Friday afternoon, not after a 5% rally that we just had [Monday], so, that function is basically clearly not there given the context. And I think we're going to look forward to the meeting, of course, but explaining why you need to do a big surprise insurance cut is not always an easy sell. And so, I think it's a little bit uphill from here. We remain, basically, pretty cautious. … Before the events of last week, before we had, basically, the sell-off, we were very defensively positioned. We viewed the equity markets as about 10% too expensive. And so, if you look at where we are trading right now, it's sort of in line with the previous growth baseline before anything's gone south. In terms of the macro data, I think that the Fed cut doesn't change that in any way, and so, you've got to wonder, are we trying to get the market back up to 10% overvalued? Or what exactly are we trying to do here?"
Fed rate cut and earnings
Kirk Hartman, president and global chief investment officer of Wells Fargo Asset Management, wondered how the cut would affect the outlook for stocks:
"This is a professional traders' market and it's very difficult to color the market. I think what's interesting about the cut: it all the more underlines, to me, [that it's] very difficult to predict the outcome and I think your outcome's going to be very bifurcated. I think, short term … the 2-year's going to go to 50 basis points, the 10-year to 1%, and you're going to see the swings in the equity market. The big question for me is what is this going to do to earnings? I think we all would agree that the best case right now is earnings are flat, and then the big question for me is what happens to the multiple? I can argue that with lower rates, the multiple should be OK, but on the other hand, there's clearly going to be more volatility and more pain, which would make me think that the [price-to-earnings] multiple is going to come down. So, you know, tough to call."
What's ahead for the Fed
Stephen Roach, former chairman of Morgan Stanley Asia and a senior fellow at Yale University's School of Management, wasn't certain the Fed even knew how its move would ultimately play out:
"I think you need to look carefully at China and what's caused this flat-line performance of the Chinese economy. The transmission effect from virus containment goes through draconian quarantines, restrictions on travel and fear of assembly in public places. We are not China, but we are going to be experiencing similar types of actions to deal [with] what the experts are saying is likely to be an increased epidemic in the United States. These are actions that are insensitive to the level of interest rates, which are already extraordinarily low. So, central banks are pulling out a playbook that was designed to deal with financial problems and not to deal with public health problems, so, I really think they're like a fish out of the water here. They have no idea how to contain or even understand what may be about to happen in the public health area or the U.S. economy's response to this."
