{"id":1676,"date":"2020-03-03T12:45:13","date_gmt":"2020-03-03T17:45:13","guid":{"rendered":"https:\/\/naroffeconomics.com\/?p=1676"},"modified":"2020-03-03T12:45:13","modified_gmt":"2020-03-03T17:45:13","slug":"fed-emergency-rate-cut-march-3-2020","status":"publish","type":"post","link":"https:\/\/naroffeconomics.com\/?p=1676","title":{"rendered":"Fed Emergency Rate Cut, March 3, 2020"},"content":{"rendered":"\n

In a Nutshell:<\/strong>  \u201cThe Fed\u2019s emergency rate cut was supposed to\nboost confidence but it may wind up raising fears that the coronavirus is\nlikely to cause a major economic downturn.\u201d<\/em><\/strong><\/p>\n\n\n\n

Decision:<\/em><\/strong> Fed funds target range cut 50 basis points to 1.00%\nto 1.25%. <\/em><\/p>\n\n\n\n

In\nan emergency action today, the Federal Reserve cut the fed funds rate by\none-half percent.  The Fed noted in its\nstatement that \u201c\u2026the coronavirus poses\nevolving risks to economic activity<\/em>.\u201d \nIn his press conference, Chair Powell indicated he knew that monetary\npolicy would not change economic fundamentals, but he was acting to boost\nconfidence.  <\/p>\n\n\n\n

He\nwas right in recognizing that monetary policy is limited in the current\nsituation but may have been all wrong when he thought he was boosting\nconfidence.<\/p>\n\n\n\n

First\nof all, you cannot fight a virus with rate cuts.  The economy will slow because of the actions\ntaken to fight the spread of the virus and those actions will not change\nbecause rates are lowered.  Indeed, it is\nhard to believe the Fed members actually think rate cuts will induce greater\nbusiness or consumer spending.  I have no\nidea what the reaction function is that goes from rate cuts to better economic\nactivity when the problem is an epidemic.<\/p>\n\n\n\n

Instead,\nit looks like the Fed, as it did starting at the end of 2018 and all through\n2019 when it reversed direction and started cutting rates, is targeting not the\nreal economy but the financial economy.  For\nthe past year, I have written that the Fed seems to have a triple mandate that\nincludes not just growth and inflation but the equity markets.  This move seems to be targeted at the equity\nmarkets, as it is not likely to do anything to either growth or inflation.  <\/p>\n\n\n\n

Since\nthe late fall of 2018, I have argued that the Fed was wrong to consider cutting\nrates when the economy was solid and I continued that criticism all through the\nrate cutting process.  <\/p>\n\n\n\n

My\nconcern was that the actions were unnecessary to sustain the expansion and all\nit would do was make it difficult for the Fed to fight a real economic\ndownturn.  In one respect, I was wrong:\nInvestor confidence remained strong, even as growth moderated as most\neconomists expected.  <\/p>\n\n\n\n

But\nthere were fewer arrows left to fire once the virus hit.  And after the current rate cut, which is once\nagain occurring before the appearance of any weakening economic data, the Fed\nis largely out of ammunition.  Do the\nmembers actually believe that taking rates back down to zero will do anything\nmore than it did in 2009?  <\/p>\n\n\n\n

Even\nworse, the Fed may have botched the messaging. \nIf you cannot wait two weeks to cut rates, then why shouldn\u2019t consumers,\nbusinesspeople and investors believe that the economy is on the verge of a\nrecession?  An emergency cut means this\nis an emergency!<\/p>\n\n\n\n

The\nmessage is that we are headed into real problems.  That is hardly the way to boost\nconfidence.   <\/p>\n\n\n\n

Where does the Fed go from here? \nOnce the softer economic numbers start coming in, and they we should\nstart seeing them as we move through the spring, more cuts will be needed.  But there is only one percentage point left\nbefore we hit zero and that last percentage point is likely to do little.  <\/p>\n\n\n\n

The Fed has botched it again. \nWhen the markets tanked in 2018, the members should have looked at it as\na resetting of overpriced markets because it was (my comment at the time was a\ncorrection is just that, a correction!). \nInstead, they panicked and cut rates to support the equity markets.  They succeeded, but at a cost.  The markets surged and we were back into an\noverpriced situation, at least when you consider an economy that was growing by\njust 2.25%.  And the Fed wasted\nseventy-five basis points of ammunition. \n<\/p>\n\n\n\n

The only good thing to say is that it is a virus that is causing\nthe economic problems and the only action that will turn things around is\nending the epidemic.  This downturn was\nnot caused by a bubble bursting or financial irresponsibility.  Instead, all it will likely require is people\ngoing back to living normal lives.  That\nmay take a while, but once it does, we are likely to see a sharp recovery.  <\/p>\n","protected":false},"excerpt":{"rendered":"

In a Nutshell:  \u201cThe Fed\u2019s emergency rate cut was supposed to boost confidence but it may wind up raising fears that the coronavirus is likely to cause a major economic downturn.\u201d Decision: Fed funds target range cut 50 basis points to 1.00% to 1.25%. In an emergency action today, the Federal Reserve cut the fed … Continue reading Fed Emergency Rate Cut, March 3, 2020<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-1676","post","type-post","status-publish","format-standard","hentry","category-economic-indicators"],"_links":{"self":[{"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/posts\/1676","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1676"}],"version-history":[{"count":1,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/posts\/1676\/revisions"}],"predecessor-version":[{"id":1677,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=\/wp\/v2\/posts\/1676\/revisions\/1677"}],"wp:attachment":[{"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1676"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1676"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/naroffeconomics.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1676"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}