In what may be a sign that things are actually worse than they currently appear to the public, the Federal Reserve held an emergency meeting this morning where they voted to cut interest rates by the largest amount (500 basis points or 0.5 percent) in over a decade.
The move was the first such cut since December 2008, during the financial crisis. It comes amid a volatile patch on Wall Street and amid a steady stream of hectoring from President Donald Trump, who has called for lower rates to stay competitive with policy at other global central banks. [...]
At a news conference later, Chairman Jerome Powell said the Fed took action after officials saw the coronavirus was having a material impact on the economic outlook.
“The magnitude and persistence of the overall effect on the U.S. economy remain highly uncertain and the situation remains a fluid one,” he told reporters. “Against this background, the committee judged that the risks to the U.S. outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.”
To say that the "risks to the U.S. outlook have changed materially" is a wonky way of saying that a storm and potential crash in consumer demand is coming.
But how is a rate cut going to help?
The market dropped by as much as 900 points this morning even after the Fed's announcement. The marker briefly recovered but then dropped again after Powell spoke to the press and implied that things are not good. It's currently down by over 900 as of this writing. Treasury yields also dropped to a new record low today. Again.
Even though the Fed's emergency rate cut didn't soothe the market, Trump called for an even bigger cut this afternoon. The problem for him, though, is that the Fed has almost nothing left to cut. The Federal Reserve has already cut interest rates to the bone while playing pooper-scooper for Trump's global trade war and there's nowhere to go but to zero or negative rates. And if the Federal Reserve goes to zero rates before an actual recession arrives, they won't be able to cut anything in response to one.
I'm not entirely sure what to make of Chairman Jerome Powell's leadership, but I think it would be fair to say he's in situation he cannot win. Cutting rates may be necessary, but it wouldn't be necessary if Congressional Republicans and the White House hadn't stood in the way of progressive fiscal policy that would eliminate the need to substitute it with monetary policy.
Central banks across the world generally don't want to act, but they have to because of polarized and paralyzed political bodies.