The Fed just cut rates inter-meeting for the first time since the terrible, dark days of December 2008, and stocks are selling off. The Dow is down more than 550 points as I write this. The president is already tweeting that "More easing and cutting!" is needed. And frankly, the market agrees.
If you're going to do something extraordinary to quell a financial panic--and it's not clear this approached that level yet--you have to do something extraordinary. You have to do "shock and awe."
But (a) the Fed's statement Friday signaled an intermeeting cut might be coming, so it lessened the shock value of this morning's move, and (b) markets had priced in 75 basis points of rate cuts at the meeting in two weeks, and the Fed only cut rates by 50 bps today. So, no awe.
And that's how you get stocks to throw a temper tantrum. So what's the Fed's next move? Another quarter-point cut at the meeting on March 18? Or not? The benchmark overnight rate which they just cut is now back to just a 1-1.25% range. That means we only have four "normal" quarter-point cuts left until we're back. At. Zero.
MUFG's Chris Rupkey may have a point when he said, in reaction to the emergency cut, that "The Fed's reckless move risks taking them out of the picture for good as an institution that can alter the course of the economy." I wrote about the risks of using monetary policy as the primary response to coronavirus yesterday.
I simply don't buy the argument that the Fed has to lower rates because the neutral rate has plunged because coronavirus is going to whack U.S. GDP. You know what else could get the neutral rate back up and help prevent a recession? Fiscal stimulus. Like I said yesterday, President Trump should come out with a jam-packed bag of really helpful goodies like a payroll-tax cut, business relief, loan forbearance, you name it. That would actually help companies and citizens cope with any interruptions from coronavirus.
Instead, to reiterate, we now have only four rate cuts left until zero. That's a pretty sobering thought. Maybe the Fed could have achieved its goals if it came out with more than the market expected, but then you're talking about what, a full percentage-point rate cut? We're venturing into absurd territory here.
Much, much, MUCH more at 1 p.m.
See you soon!
Kelly
P.S. The Exchange is now a podcast! Click to subscribe.