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Fed Rate Cut Backfires, Panics The Market, 9 Dead From Coronavirus

Fed Chair Jerome Powell. YouTube

The Fed cut interest rates by 50 basis points today, a rare, unannounced intra-meeting cut. The idea was to juice markets rattled by the novel coronavirus (COVID-19). The desire was to send markets higher. The effect was to spook investors into believing that the virus is more of a threat than previously estimated.

Image via Twitter.

Those fears were soon confirmed. The news from Washington state, that nine coronavirus patients have died, moved the market lower still, giving back much of yesterday’s gains.

Further, the impotency of the Fed was highlighted: they have one tool to influence the market. When all you have is a hammer, as they say, everything looks like a nail. And in this case, the nail was struck too hard. A 25 basis point cut might have been more advisable, especially since 50 b.p. cuts have become so rare in recent years. Today’s cut was the biggest since 2008.

The timing–of the cut, then news of the deaths–was horrible. Fresh off the largest single day gain ever–which followed the largest single-day selloff ever–what markets needed was stability. Time to let the dust settle. Granted, yesterday’s gains were based on the assumption that central banks would intervene, but such a large cut sent the message that the outlook for coronavirus-related market slowdowns are worse than previously thought.

The deaths, primarily among nursing home occupants, are sure to frighten American citizens. Till this point, the disease was more of an abstraction.

Another issue is the credibility of the Fed. In their February meeting, they passed on a rate cut, saying there was no need. Then the market sold off 15%, and all of a sudden, a half-percentage point cut. Granted, the coronavirus does have real consequences for markets, but today’s move feels like an overreaction. If they had waited two weeks for their next meeting, perhaps the reaction would have been more muted.

Hopefully markets stabilize tomorrow as more and better information surrounding the virus is disseminated. If not, things could get far uglier, and quickly.

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